Rise in Unemployment Could See Federal Reserve Soften Stance on Interest Rates

Employment in the United States rose by 261,000 in Oct, according to the latest data from the U.S. Bureau of Labor Statistics. 

This figure came in higher than estimates of 200,000-205,000, indicating that the labor market remains resilient. However, unemployment also came in higher than expected at 3.7%, rather than the anticipated 3.5%. 

Markets Buoyed By News

While higher unemployment is typically perceived as negative, with regard to its implications for inflation, the markets responded positively. Futures for the Dow Jones Industrial Average rose some 0.6%, those for the S&P 500 0.7%. Meanwhile, Nasdaq 100 futures also bumped up 0.8%.

Crypto markets also responded enthusiastically, with Bitcoin price (BTC) up over 1% and Ethereum (ETH) price rising more than 2% in the past hour. Total cryptocurrency market capitalization has also increased 2.6% over the past 24 hours.

Fed May Start to Lower Interest Rates

The reason the news was well-received is because of how it could affect the Federal Reserve. The Fed raised interest rates by three-quarters of a percentage point for a fourth consecutive time earlier this week. 

It has been pursuing aggressive interest rate hikes in an effort to rein in rampant inflation. However, the monetary authority indicated that it could potentially start slowing the pace of these rate hikes. 

Higher Interest Rates Lead to Hiring Cuts

This is where the unemployment data comes in. As the Fed raises interest rates, it makes it more difficult for businesses to continue hiring, among many other things. A higher unemployment rate indicates that the labor market is cooling, meaning the Fed’s actions are taking effect. 

In this case, the Fed may choose to take a mildly softer approach during its next meeting on Dec. 14. “The economy has transitioned from white hot to red hot,” said Glassdoor economist Daniel Zhao. “It’s still a very hot labor market, but it has cooled down.” 

However, as the robust hiring numbers demonstrate, the market may not be slowing down enough to make a difference. Indeed, wage growth continued with a 0.4% rise over the previous month, which could still contribute overall to inflation.