The U.S. job market took its first turn negative in seven years in September when the economy lost 33,000 net jobs, according to the monthly report from the Bureau of Labor Statistics. Despite the dip, hourly wages showcased strong gains and officials seem on track to continue with planned interest rate hikes.

Friday’s poor showing in the jobs market is being blamed on Hurricanes Harvey and Irma, which devastated large sections of Texas, Florida and the Gulf Coast, including the large regional economies of Houston and South Florida.

On the bright side, the unemployment rate dropped to 4.2 percent, beating predictions that it would register 4.4 percent. Economists also expect the eventual rebuilding in areas hurt by the hurricanes to provide a lift to workers as construction and recovery efforts increase employment.

Perhaps the most important number in September’s jobs report is the 2.9 percent increase so far this year in hourly wages. Analysts have waited for months to see wages improve and September delivered. The dynamic between jobs and wages in a healthy market is such that when unemployment drops, wages rise. Why? As workers have more job options, employers are forced to pay more for talent.

In this economic cycle, unemployment has continued to decline for years, but wages have puttered along, growing at a slower than expected rate. September could be a sign that the job market is now nearing full capacity and employers are finally being forced to pay higher wages to keep good workers. This would be another good sign for economic growth and encourage policymakers to keep moving ahead with planned interest rate hikes.

The Federal Reserve, which has a dual mandate to keep employment full and inflation in check, meets again at the end of this month and a final time this year in December. Wall Street investors are expecting an interest rate increase at the December meeting.

Normally, a weak jobs number would give Fed governors pause about more rate increases. However, two key officials on Friday indicated the trajectory of a December increase is unchanged.

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, this week said he expects a rate hike in December and three more in 2018. Meanwhile, his colleague Robert Kaplan, president of the Dallas Federal Reserve, said he is “open-minded” about a December increase, even after the disappointing jobs report.

“I’d rather look at three- to six- to nine-month trends. And I think a lot of these job losses, in our judgment, will be temporary,” Kaplan, a voting member of the Open Market Committee, said in a CNBC interview Friday. The Open Market Committee is the voting body that determines monetary policy in the U.S. and sets benchmark interest rates.

Additionally, the 10-year Treasury yield increased to a three month high at 2.39 percent after the jobs data was released. I take this as a sign of increased confidence that employment is near full capacity and wage growth will boost inflation. All of these add up to a December interest rate increase. In fact, the market now looks to be pricing in a 90 percent chance the Fed acts in December.

Of course, all these decisions are being made with the undercurrent of a new Fed Chair being considered by President Donald Trump. Fed Chair Janet Yellen is nearing the end of her four-year term and, as a Barack Obama appointee, faces the prospect of being replaced by the president.

President Trump is said to be weighing four or five candidates for the important position, including Yellen, White House economic adviser and financier Gary Cohn, Fed Governor Jerome Powell, former Fed Governor Kevin Warsh and economist John Taylor.

In next week’s blog, we will look at each person and their policy leanings.


About the Author:

Greg Richardson - EVP of Capital Markets

Greg Richardson is Movement's EVP of Capital Markets and a contributing author to the Movement Blog. His weekly market update is a must-read commentary on financial markets, the mortgage industry and interest rates. Greg is an industry veteran who knows how to read the financial tea leaves and make complex industry data easy for loan officers, real estate agents and homebuyers to understand.