(Reuters) - Federal Reserve policymakers were provided only a few signs of encouragement on Friday as new data showed another month of robust U.S. job gains, underscoring concerns their campaign to hike interest rates to bring down high inflation has yet to really bite in the labor market or wider economy.
The United States added 261,000 jobs last month, the Labor Department said in its closely watched employment report, well above the 200,000 gain expected by economists in a Reuters poll. Data for September was revised higher to show 315,000 jobs created instead of the previously reported 263,000, but the unemployment rate ticked up to 3.7% from 3.5%.
"The data are still showing strong positive momentum in the labor market, which is not yet showing much adjustment in response to a rapid tightening of monetary policy. These data will keep the Fed on track to keep raising rates into restrictive territory," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
The U.S. central bank on Wednesday raised rates by 75 basis points for the fourth consecutive meeting, but signaled it hoped to shift to smaller hikes in borrowing costs as soon as its next meeting in December as it allows time for the economy to absorb the swiftest tightening of monetary policy in 40 years.
However, Fed Chair Jerome Powell tempered that message with a warning that rate increases, while possibly smaller, will persist long enough that rates will ultimately rest higher than policymakers previously thought and that any talk of a pause was "very premature." The Fed's key policy rate currently sits in a 3.75%-4.00% range.
Investors in futures contracts tied to the Fed's benchmark overnight interest rate kept their bets that a 50-basis-point rate hike in December is slightly more likely than another 75-basis-point hike following the employment report, and though traders are still are wagering on that rate rising to a 5.00%-5.25% range by March of next year, they have eased off bets of it climbing higher than that level.
DELICATE BALANCING ACT
The Fed is trying to thread the needle on softening the labor market enough to tamp down high job vacancy rates and wage growth, which have helped fuel inflation, without causing a sharp spike in unemployment which would see it having to ease off the throttle sooner than desired.
Persistently strong job gains also make it difficult for the central bank to let up, increasing the likelihood it has to lift borrowing costs so much that it upends the economy and triggers a painful recession.
For months the labor market has remained buoyant even as interest rates have risen and barely a dent has been made in bringing down the highest rate of inflation in 40 years. By the Fed's preferred measure, it is running more than three times the central bank's 2% target.
Friday's employment report offered some indications of progress, most notably the slowdown of job gains in some sectors. The household survey portion of the report also showed a sharp fall in employment, while the rise in the unemployment rate suggests some loosening in labor market conditions.
Annual wage growth also appears to have peaked even as average hourly earnings rose more than expected in October on a monthly basis to the highest reading since July.
That gives some weight to a closely watched forward-looking labor costs report last Friday which showed a considerable slowdown in private-sector wage growth in the third quarter, suggesting wage pressures may have peaked.
But overall pressures remain. Earlier this week, separate government reports showed U.S. job openings unexpectedly rose in September while the number of Americans filing new claims for unemployment benefits unexpectedly fell last week. There are still 1.9 job openings for every unemployed worker.
The wage growth data released on Friday "is still too fast to be consistent with the Fed's 2% inflation target, and with employment growth still surprisingly resilient ... this release will do little to alter the Fed's resolute hawkishness," said Michael Pearce, a senior U.S. economist at Capital Economics.