Stronger-than-expected October nonfarm payrolls data has reignited Wall Street's appetite for betting on a Federal Reserve rate hike in December. Following the report's release, traders estimated the probability of a 25-basis-point increase at the December meeting had climbed above 80%.
According to data released by the Bureau of Labor Statistics (BLS) on Friday, November 6, nonfarm payrolls rose by 165,000 in October, far exceeding Wall Street's expectation of 70,000. The unemployment rate fell to 4.1%, while the labor force participation rate rose to 61.9%, both defying market expectations that they would hold steady at September levels. Average hourly earnings rose 0.4% month over month, a faster acceleration from September than the market had anticipated. Employment, unemployment, and wage indicators were broadly strong.
Several Wall Street institutional figures believe this report provides more solid justification for the Fed to raise rates again in December. However, energy prices and the trajectory of future inflation, as well as the impact of the recent selloff in AI-related assets on financial conditions, could still sway the Fed's next move.
Nick Timiraos, a reporter known as the "new Fed wire," argued that this employment report has not shaken the Fed's assessment of economic growth and inflation, but whether the recent AI-related asset selloff will alter financial conditions could become another variable in the December policy decision. Whether Fed Chair Warsh places more weight on lagging employment data or forward-looking market signals has become a focal point worth watching.
December Hike Odds Briefly Reached 85%, Wall Street Sees Strong Jobs Giving Fed Room to Act
Following the employment report's release, interest rate markets quickly adjusted policy expectations. Reports indicated that traders' bets on a 25-basis-point hike at the Fed's December meeting rose to roughly 85%, up from about 75% before the report's release. Market expectations for the timing of the next hike also moved forward.
Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, believes this nonfarm report has cleared the way for a December rate hike. She said: "This nonfarm data removed the traffic light in front of the Fed at the December policy crossroads." A persistently tightening job market gives the Fed room for further rate increases without necessarily harming its employment objectives.
Jeff Schulze, chief investment strategist at Franklin Templeton Institute, said the strong October employment report, against a backdrop of post-midterm-election concerns that a slowdown in AI construction could weaken rate hike expectations, has renewed rate hike pressure on the Fed.
Ryan Weldon of IFM Investors also believes that although another inflation report will be released before the Fed's December meeting, strong economic performance and sticky inflation make it difficult for the Fed to avoid the rate hike option.
Olu Sonola, an analyst at Fitch Ratings, noted that this is a very strong labor market report. Combined with solid GDP and consumption data, the U.S. economy remains resilient, and AI-related concerns have not yet clearly changed this assessment. As the job market holds firm, the Fed's policy discussion may shift further toward inflation and a December rate hike.
Employment and Wages Strengthen Together, but Structural Concerns Linger in the Labor Market
October nonfarm payrolls rose by 165,000, not only far exceeding market expectations but also marking the third-highest monthly gain since 2026, behind only March and August. The prior two months' employment data were also revised upward: August job gains were revised from 133,000 to 186,000, and September from 29,000 to 60,000, for a combined upward revision of 84,000.
By industry, professional and business services added 70,000 jobs, healthcare added 42,000, transportation and warehousing added 25,000, and manufacturing added 19,000. Leisure and hospitality shed 13,000 jobs. The notable acceleration in professional and business services employment also offers a noteworthy counter-signal to concerns that AI is rapidly eroding white-collar jobs.
Carl Weinberg, chief economist at High Frequency Economics, believes the U.S. economy is already at or very close to full employment. Strong labor demand means the Fed needs to watch whether labor demand is outpacing supply.
Wage data also reinforced signals of an overheated job market. Average hourly earnings rose 0.4% month over month in October, above the market expectation of 0.3% and a sharp acceleration from September's 0.1% gain. The year-over-year increase was 3.1%. The labor force participation rate also rose from 61.8% in September to 61.9%, indicating that job growth was not entirely driven by workers exiting the labor market.
However, the report was not without concerns. The number of people working part-time for economic reasons increased by 339,000 to about 4.84 million, showing that some workers still cannot secure their desired full-time jobs.
BRIAN JACOBSEN, chief economic strategist at Annex Wealth Management, noted that although wages rose 3.1% year over year, if inflation exceeds that level, workers' real average hourly earnings would still decline. He called this phenomenon "an affordability crisis in a single number." In his view, rising energy prices pushing up the cost of living could further increase policy pressure on the Fed.
Inflation and Energy Prices Remain Key Variables for the Rate Hike Path
Although the employment report reinforced December rate hike expectations, Wall Street figures do not believe a single employment report can determine the Fed's policy path. The next round of inflation data, energy price trends, and the impact of higher rates on financial markets and economic activity remain key variables.
Carl Weinberg, chief economist at High Frequency Economics, believes the economy is at or near full employment, and the Fed needs to guard against inflation risks from labor demand exceeding supply.
PETER CARDILLO, chief market economist at Spartan Capital Securities, believes the unemployment rate falling to 4.1% and wage growth exceeding expectations show the job market remains strong. He judges that a December rate hike is already difficult to avoid, and the remaining question is whether the Fed raises rates by 25 or 50 basis points.
But ANSHUL SHARMA cautioned that inflation, especially energy prices, still needs monitoring. Even if employment and wage data support a rate hike, if energy prices fall and inflation pressure eases, the Fed could still reassess its policy options.
Wall Street Divided: Stock Market Volatility and AI Investment Outlook May Constrain the Fed
Strong employment data pushed rate hike expectations higher, but recent financial market volatility has also led some market participants to remain cautious about whether the Fed will act in December.
JOE SALUZZI, co-head of Themis Trading, believes the strong payroll gains, wage growth, and prior data revisions have indeed increased the likelihood of the Fed's next rate hike. However, stock market volatility had already risen notably the previous day, and whether the Fed would choose to raise rates at a time of financial market instability is still worth watching. He said that if the Fed met tomorrow, based solely on this employment report, he would not consider a rate hike a foregone conclusion.
TIM HOLLAND, chief investment officer at Orion, also noted that strong employment data could push Treasury yields higher and add pressure on stocks. With the market already affected by the outlook for the AI capital expenditure cycle and policy uncertainty, further rate increases could continue to weigh on risk assets.
SUSANNAH STREETER, chief investment strategist at Wealth Club, believes the strong employment report reduces the likelihood of near-term rate cuts and reinforces the view that rates will stay high for longer. The resilience of the job market also offsets some market concerns that a slowdown in data center construction and increased AI regulation could drag on economic growth.
"New Fed Wire" Raises Policy Variable: Does the Fed Look at Lagging Employment Data or Forward-Looking Market Signals?
Nick Timiraos noted on social media that U.S. nonfarm payrolls rose by 165,000 in October, with August and September data revised up by a combined 84,000, and the unemployment rate also edging down to about 4.14%. Regardless of the observation lens used, U.S. job growth has re-accelerated after nearly stalling last summer.
But Timiraos believes these data are not enough to make the Fed reconsider its assessment of economic growth and inflation. What truly deserves attention is whether the AI-related asset selloff will change financial conditions and thereby affect the Fed's evaluation of policy effectiveness.
The core tension he raised is this: Fed Chair Warsh has said he prefers to reference market signals that reflect the future trajectory of the economy rather than lagging economic data. Now, the employment report shows economic growth remains resilient, but the AI-related asset selloff could affect financial conditions through stock prices, financing conditions, and risk appetite. Heading into the December meeting, which type of signal the Fed will weight more heavily could become the key to policy discussions.
This also means that although the October nonfarm report has renewed rate hike expectations, the final decision will not simply be an extension of employment data. The next round of inflation data will test whether wage and employment resilience translates into more persistent price pressure, while changes in financial markets could influence the Fed's judgment on the future economy and policy transmission.
Comments