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The US Federal Reserve building is pictured in Washington on March 18 2008. File Picture: REUTERS/Jason Reed
The US Federal Reserve building is pictured in Washington on March 18 2008. File Picture: REUTERS/Jason Reed

The US Federal Reserve (Fed) is likely to be finished raising interest rates, traders bet on Friday, after a government report showed the unemployment rate rose in August and wage growth cooled.

Futures that settle to the Fed’s policy rate had already priced in only a slight chance of a rate hike in September. They now reflect the chance of US central bankers tightening policy any further in 2023 dropping to about 38% from about a 45% chance seen before the latest jobs report.

That labour department report showed the unemployment rate jumped to 3.8% in August, from 3.5% previously, and average hourly earnings rose 4.3% from a year earlier, compared with 4.4% in July. Employers added 187,000 workers to their payrolls in August, more than they did in July, though revisions showed job growth in the prior months was not as strong as first reported.

“This report is likely to put the Fed on hold in September, and if we get more positive inflation news in September and October, the Fed is likely done, and we’ve seen the end of the rate hikes,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

The Fed raised short-term borrowing costs aggressively starting in March 2022 to fight 40-year-high inflation, most recently in July when it increased its target range for the benchmark rate to 5.25%-5.50%.

Inflation has eased from its peak of 7% last US summer to 3.3% in August, based on the Fed’s preferred inflation measure, but policymakers say it is still too high and have been looking for the labour market to soften somewhat to keep downward pressure on prices. The Fed targets 2% inflation.

Cleveland Fed president Loretta Mester, one of the central bank's more hawkish policymakers, signalled that she may need more convincing on whether the rate hikes have indeed gone far enough.

She said last week she believed the Fed needed to notch rates up a bit further — a view that as of June most of her colleagues also embraced.

“In the labour market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong,” she told a European Central Bank conference shortly after the latest jobs report.

Traders currently see the Fed likely to be on hold to April, with rate cuts to start in May. 

Reuters

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