Fed rate hike odds jump after October jobs report as officials signal more tightening

Traders are increasing their bets on another Federal Reserve interest rate hike in December after a stronger-than-expected October employment report showed that the US labor market remains resilient.

The chance of a December rate hike rose to 77%, up about 10 percentage points from Thursday, according to CME FedWatch data.

The repricing suggests investors are becoming increasingly concerned that the central bank may need to tighten monetary policy further rather than pause its rate increases.

Job report comes in hot

The Labor Department reported on Friday that US employers added 165,000 jobs in October, more than double economists' expectations of 65,000.

The unemployment rate also declined to 4.1% from 4.2%, while average hourly earnings increased 0.4% month over month, marking their strongest monthly gain since January.

Labor Department revisions also added a total of 84,000 new jobs to the August and September totals.

The stronger labour market data pushed Treasury yields higher with the benchmark 10-year note rising four basis points to 4.88.

The latest numbers followed the Federal Reserve's decision last week to leave its benchmark interest rate unchanged in a range of 3.75% to 4%, after raising it in September.

The October employment data have strengthened expectations that policymakers could resume tightening as they continue to battle inflation.

Fed officials signal more rate increases

Comments from several Federal Reserve officials this week have reinforced expectations that borrowing costs may need to move higher.

Cleveland Fed President Beth Hammack said on Thursday that monetary policy would need to become restrictive to bring inflation back to the central bank's 2% target.

"I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner," Hammack said.

She favored smaller and more frequent rate adjustments, arguing that a gradual approach would be less disruptive to households, businesses and financial markets.

She also warned that delayed action could allow inflation expectations to become entrenched.

Hammack, along with Fed Governor Lisa Cook, voted in favor of a rate hike last week.

Richmond Fed President Thomas Barkin echoed those concerns, saying inflation remained too high and was holding steady rather than declining.

"Inflation is too high. That means the path is pretty straightforward. The question, of course, is pace,” Barkin told CNBC.

New York Fed President John Williams struck a somewhat similar tone on Friday.

While acknowledging that inflation remains elevated, he suggested policymakers should assess incoming data before deciding on further action.

"Inflation is absolutely too high. It's been too high for too long," Williams said at a European Central Bank conference in Frankfurt.

The latest jobs figures have strengthened the case for higher borrowing costs, but the wage data offer a more complicated picture.

Although monthly earnings accelerated, annual wage growth stood at 3.1%, remaining below inflation for the seventh consecutive month.

Investors will continue monitoring inflation, employment and energy prices for clues about the Fed's next move.

AI disclosure: AI tools assisted with research and drafting of this piece. An Invezz editor reviewed the facts, sources and wording before publication. Any opinions or analysis are Invezz’s, not those of an automated system.