U.S. employment and wages slow down... The freeze on interest rates in October gained momentum.

September hourly wages rose 0.1% compared to the previous month... Job growth was only 29,000.

Easing concerns about wage and price chain increases... Pay attention to the 14-day CPI to gauge further tightening

As employment and wage growth in the United States slowed, expectations for the Federal Reserve (Fed) to freeze interest rates in October increased. As signals that pressure to further stimulate prices in the labor market are growing weaker, the Federal Reserve is assessed to have gained some time to wait for the next indicator.

Last month, the Federal Reserve raised the Base Interest Rate by 0.25 percentage points, adjusting it to 3.75-4.00% per year. This is to respond to price pressure caused by rising energy prices and expanded investment in artificial intelligence (AI). John Williams, President of the Federal Reserve Bank of New York, emphasized on the 29th of last month that the shock that raised prices should not be fixed and the secondary effects of the shock should be suppressed.

Wages are one of the channels through which this secondary effect can occur. To compensate for the increase in cost of living, wage increases accelerate, and when companies reflect the increased labor costs in the prices of products and services, prices rise again. If the process of rising prices stimulating wage increases is repeated, inflation may continue even after the initial shock subsides. This is the so-called ‘wage/price vicious cycle’.

Raising interest rates is a means of curbing this trend. If borrowing costs rise, consumption and investment may decline and corporate hiring demand may decrease. As labor demand weakens, upward wage pressure also decreases. Governor Williams also explained that although monetary policy cannot directly resolve energy supply disruptions, it can reduce the risk that the shock will spread to widespread and sustained price increases.

What was confirmed in this employment report is the slowdown in wage growth. The average hourly wage in the private sector in September, announced by the U.S. Bureau of Labor Statistics on the 2nd, rose 0.1% compared to the previous month, down from 0.3% in August. The increase rate compared to the same month last year was 3.0%. The previously announced real average hourly wage in August decreased by 0.3% compared to the same month last year. While the purchasing power of hourly wages, which reflects the rise in prices, has decreased, the rate of increase in nominal wages has also slowed in September. This slowdown in wage growth is interpreted as a factor that reduces the pressure on labor costs to stimulate further price increases.

Employment indicators that correspond to companies' demand for hiring also slowed. The number of non-agricultural jobs in September increased by 29,000 from the previous month, down from the revised figure of 133,000 in August. The employment increase in July and August was revised downward by a total of 60,000 people, and the unemployment rate increased from 4.1% to 4.2%. When viewed together with the slowdown in wages, this result gives less weight to the judgment that further austerity measures must be hastened due to the overheating labor market.

This supports the Federal Reserve's wait-and-see stance taken even before the employment report was released. In the same speech, Williams said there was no evidence that the labor market was adding to price pressures. He also explained that after the interest rate increase in September, there will be time to check additional information without rushing.

Expectations for a market freeze have also increased. 

The Wall Street Journal reported on the 2nd that immediately after the employment report was released, the probability of an October freeze reflected in CME interest rate futures rose from 72% before the announcement to 86%. These are the figures at the time of reporting.

The remaining variable is price pressure other than wages. Philip Jefferson, Vice Chairman of the Federal Reserve, pointed out on the 1st that even as the growth of nominal wages is slowing, the inflation rate of core services, excluding housing costs, is increasing this year. He explained that the surge in demand for AI is also driving up the production costs of related products and services. Even if wage growth slows, price stability may be delayed if other costs continue to rise.

Therefore, the outlook for a freeze in October and an additional increase within the year remain. Michael Ferroli, JP Morgan's chief U.S. economist reported by Reuters, assessed that the need to hasten an interest rate hike has diminished due to the slowdown in wages, but maintained the forecast for a December hike on the premise that the slowdown in core prices will be slow in the future.

The next major confirmation indicator is the September Consumer Price Index (CPI), which will be announced on the 14th. The key question is whether the rise in prices of goods and services will subside following the slowdown in wages. Through this, the Federal Reserve will determine whether to maintain the interest rate after the September hike and monitor it, or whether additional response is necessary.