Soft September Jobs Report Has Market Dialing Back Calls for Fed Rate Hike

Key Takeaways

• The US economy added 29,000 jobs in September, fewer than economists were expecting, while the unemployment rate rose slightly to 4.2%.
• The labor market remains solid despite the softer-than-expected data, analysts say.
• Investors dialed back their expectations for an interest rate raise in October.

The US labor market looks stable, even as job growth slowed in September. Against that backdrop, analysts expect the Federal Reserve to remain focused on bringing inflation, which has run hot for more than five years, down to target.

The US economy added 29,000 jobs last month, according to data released Friday by the Bureau of Labor Statistics. That is fewer than the 95,000 economists expected and far fewer than the revised 133,000 jobs added in August. The unemployment rate rose slightly from 4.1% to 4.2%.

Traders pared back their expectations for an October interest rate hike after the report. The bond futures market puts the chances of a Fed rate increase this month at less than 20%. A week ago, that prediction stood at over 60%.

David Doyle, head of economics at Macquarie, says the data is encouraging, despite the relatively weak headline number. He points to a rising labor force participation rate and gains in cyclical industries like construction and manufacturing. “The labor market remains healthy underneath the surface,” he says.

After the rapid cooling of the labor market in 2024 and 2025, Morningstar senior US economist Preston Caldwell describes September’s report as evidence that fears of further deterioration have been allayed. Against that backdrop, he says, the Fed will look to other data to inform its interest rate decisions in the coming months.

Job gains in September were driven by construction, manufacturing, and healthcare. Meanwhile, the government and financial services industries lost jobs.

September Jobs Report Key Stats

• Total nonfarm payrolls rose 29,000 after rising by a revised 133,000 in August.
• The unemployment rate rose to 4.2% from 4.1% in August.
• Average hourly earnings rose by 5 cents, or 0.1%, to $37.81.

Analysts emphasize that the unemployment rate, while higher in September, has remained in a tight range for several months.

“I don’t suspect that this is the start of a sustained rise in unemployment,” says Macquarie’s Doyle. He says a more expansive measure of unemployment fell slightly in September.

Odds of an October Rate Hike Fall

Analysts say September’s slower jobs growth likely reduces the odds that the Fed will raise interest rates in October. A more stable employment picture gives central bankers leeway to keep rates steady without worrying that the economy is overheating.

“Today’s soft payroll report demonstrates that the labor market is simmering, not boiling,” Jeff Schulze, head investment strategist at the Franklin Templeton Institute, wrote Friday morning.

“With revised inflation data looking somewhat softer, the Fed may decide to pause in October,” says Morningstar’s Caldwell. He says one rate hike before the end of the year is still likely.

Doyle of Macquarie also expects the Fed to wait until December to raise interest rates again. “The evidence is supportive that underlying inflation ... is heading in the right direction,” he says.

Bond futures traders are now pricing in an 18% chance of an October rate hike, according to CME FedWatch, down from 24% odds on Thursday and 64% the previous week.