Think the Fed will be done after two more rate hikes? How Friday's jobs report may trigger a major market repricing.

By Michael Kramer

Unexpectedly hot jobs data could affect the number and timing of future rate hikes

The Federal Reserve is expected to raise rates in December and once again in 2027. But a hot jobs report could change that.

With the futures market pricing in nearly an 80% chance of a Fed rate hike at its next meeting, the October jobs report arrives at a pivotal moment.

It could significantly shape how markets view the Fed's policy path, at least until the November jobs report in the first week of December. A strong jobs report would leave the Fed in a better position to focus solely on its inflation mandate. It may also mean the market needs to rethink the two additional hikes it is currently pricing in.

Friday's October jobs report is not expected to be strong, but the number of jobs created each month has steadily come down over the past year. What is clear is that the slowdown seen heading into the fall of 2025 is now well behind us, and job growth has returned, even if at a more modest pace.

Modest estimates

For the October report, analysts forecast nonfarm payrolls to grow by 65,000, up from 29,000 in September, with the unemployment rate unchanged at 4.2%. Wage growth is expected to rise 0.3% month over month, up from 0.1%, and 2.9% year over year, down from 3.0%. The average work week is expected to remain unchanged at 34.4 hours.

Analysts have projected slower job growth for some time, with estimates averaging around 64,000 a month since October 2025, down from around 171,000 a month from January 2023 through July 2025, but the trend clearly began to turn lower in the spring.

Comparing U.S. initial non-farm payrolls (dark blue) with the median forecast (light blue) from late 2021 to 2026, showing volatile initial data trending lower over time alongside relatively stable median expectations.

However, this has had very little impact on analysts' accuracy. Since January 2025, the jobs report has come in above estimates 11 times and missed 10 times. When the jobs report beats, it does so by around 63,000 jobs on average; when it misses, it is by 59,000 on average.

Comparing non-farm payrolls data and estimates for the U.S. in 2025 and 2026. The top chart compares the median non-farm payrolls estimates (blue bars) with the initial non-farm payrolls data (magenta bars). The bottom chart shows the difference between the initial data and the median estimate, with positive values in green and negative values in red, fluctuating between roughly -150 and +120.

Evidence suggests healthy growth

What may matter more as a gauge of labor-market health is that the Indexes of Aggregate Weekly Payrolls of All Employees may have settled and appears to be growing at a consistent rate since bottoming in December 2025. It has since recovered some, suggesting the slowdown in the labor market and wage growth has stabilized.

So even though headline wage growth and job creation have slowed, growth appears consistent with the labor market seen just prior to the COVID pandemic, between 4% and 5% a year. The problem is that inflation has run high, which has hurt real wages, and that is why the Fed needs to focus more on that side of its mandate.

Comparing the 1-year percentage change in total private weekly payrolls in the U.S. (red line) from 2017 to 2026, and the one-year moving average (magenta line).

This suggests that if the jobs report doesn't show a spike in unemployment or an unexpected drop in payrolls, the market's view of the Fed's policy path is unlikely to change much.

What could change that market view on rate hikes is a report that comes in much hotter than expected, with the unemployment rate falling sharply. That would likely raise the odds of a December rate hike, but more importantly, it could also speed up expectations for the timing of rate hikes and potentially add more hikes to the outlook.

How many more hikes are needed?

Currently, the market is pricing in one hike in December and one more in 2027, and sees the hiking cycle ending in 2027. While another jobs report is still due in early December ahead of the Fed meeting, a strong October report strengthens the case for further tightening, and a strong November report would sound the alarm for more than two more rate hikes.

This sets up a question of whether the market's assumption of just two more rate hikes is correct, or whether the number of Fed hikes has been sufficiently priced in. With two increases priced in, in addition to September's hike, the market is assuming the Fed will simply reverse the cuts delivered at the end of 2025. But that assumption may be wrong, given that inflation struggled to return to the Fed's target before those cuts. Headline PCE bottomed in March 2025 at 2.3% and started to rise right after that, even before the Fed began cutting rates.

Comparing the headline PCE 1Y% change (purple line) and the U.S. fed funds effective rate (light blue line) from 2023 through 2026.

So if headline PCE never got back to 2% when the effective fed funds rate was 4.3%, what is the thinking that just taking it back to 4.3% will be enough this time around?

Michael Kramer is the founder of Mott Capital Management and a long-only investor focused on macroeconomic themes. He analyzes long-term macro trends and short-term market risk using technical analysis, fundamentals and options-market positioning. See here for further disclosures.

-Michael Kramer

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11-04-26 0800ET