US added far more jobs than expected in October, with the probability of a Fed rate hike in December rising to 85%

Reuters, November 6 - A stronger-than-expected October employment report has strengthened the case for further Federal Reserve rate hikes. Previously, following post-election stock market sluggishness in the U.S. and increasing concerns that AI-driven demand might suddenly halt, expectations for further hikes had clearly weakened.

The U.S. Bureau of Labor Statistics (BLS) reported Friday that American employers added 165,000 jobs in October, double economists’ forecasts; the unemployment rate fell to 4.1%.

Last month, Fed Chair Waller said that policymakers would be watching the “accumulating data” to decide whether further tightening of monetary policy was needed, and the latest labor market report, clearly, provides a positive answer to this question.

“Following last week’s robust GDP and consumer spending data, this is an exceptionally strong labor market report that further reinforces positive economic momentum,” Fitch Ratings analyst Olu Sonola wrote after the report’s release.

Sonola noted that recent concerns about AI do indeed pose risks to this outlook, “but for now, the foundations of the economy remain solid. The resilience of the labor market allows the Fed to stay focused on inflation, and further push policy discussions in the direction of a December rate hike.”

On Tuesday, the election of several Democratic governors, along with the party securing a significant majority in Congress, stoked market fears of tighter AI-related regulation. As investors gradually digested the implications of this political shift, the Nasdaq Index posted its biggest one-day drop in 19 months on Thursday.

Many newly elected governors pledged during their campaigns to restrict data center construction, while Democratic Congressional leaders are planning to introduce a series of new AI legislative initiatives.

Worries surrounding AI have also prompted traders to scale back previous large bets on a December Fed rate hike. The market now thinks that, should AI-related demand slow, it could drag on economic growth and ease inflationary pressures, thus reducing the urgency for further monetary tightening.

However, Friday’s employment report has once again brought rate hikes by the Fed back into the market spotlight.

Following the release of the data, the market now places the probability of the Federal Reserve raising rates by 25 basis points at its December 8-9 meeting at around 85%, up from about 75% prior to the data publication.

Traders now also expect the Fed’s next and final rate hike of this cycle will be brought forward to April next year, rather than the previously expected June. U.S. inflation has remained above the Fed’s 2% target for more than five consecutive years.

“For the Fed, this means it can focus attention on its inflation target,” Raymond James analysts wrote, “We expect the Fed will raise the federal funds rate by 25 basis points in December.” (End)

(Editor Liu Jing)

((REBECCA.LIU@thomsonreuters.com;))