Federal Reserve rate hike bets strengthen as US jobs growth beats estimates

The Federal Reserve's case for another interest rate hike in December has gained momentum after stronger than expected US employment data reinforced signs of economic resilience, shifting attention back to persistent inflation from concerns over a potential AI driven slowdown, Reuters reported.

US employers added 165,000 jobs in October, more than double the 65,000 expected by economists, according to the Bureau of Labor Statistics. The unemployment rate also edged down to 4.1%, suggesting the labour market remains firm despite concerns over the economic outlook.

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Following the report, markets priced in an 85% probability of a quarter point rate increase at the Fed's December 8-9 meeting, up from around 75% before the data release. Traders also brought forward expectations of another rate increase to April from June, Reuters reported.

Strong jobs data reinforce Fed's hawkish outlook

The employment figures strengthen the argument for further monetary tightening as the Fed continues to battle inflation, which has remained above its 2% target for more than five years.

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"This is a very strong labor market report on the heels of solid GDP and consumer spending data last week, reinforcing the economy’s positive momentum," Fitch Ratings analyst Olu Sonola wrote after the release.

While acknowledging the risks posed by recent AI related concerns, Sonola said the economy remained on firm footing and that labour market resilience was pushing the policy debate towards a December rate hike, Reuters reported.

Raymond James analysts also expect the central bank to raise rates next month.

"For the Federal Reserve, this should allow them to concentrate on the inflation side of their mandate," the analysts wrote. "We expect the Fed to increase the federal funds rate by 25 basis points in December."

AI concerns had clouded rate outlook

Expectations of another rate increase had weakened after Democrats' midterm election gains raised concerns about tighter regulation of AI and data centre construction.

The prospect of slower AI investment had fuelled worries about weaker economic growth and easing inflationary pressures, reducing the urgency for further monetary tightening.

However, Friday's employment report has renewed expectations that the Fed will prioritise inflation control as it assesses the strength of the US economy.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)