Strong August Jobs Report Sharpens Fed’s Focus on Inflation

Key Takeaways

• The US added 162,000 jobs in August, according to the Bureau of Labor Statistics.
• Friday’s numbers blew past economists’ expectations and showed broad strength across industries.
• Economists say the report reaffirms the Federal Reserve’s focus on prices heading into the central bank’s next interest rate decision later this month.

The labor market picked up steam in August, ending a sluggish summer for hiring. The US economy added 162,000 jobs last month, according to the latest report from the Bureau of Labor Statistics. The report also revised July’s numbers up by 44,000, suggesting the economy actually added 21,000 jobs rather than shedding 23,000 that month.

The Wall Street consensus was that the economy would add 65,000 jobs in August, but many economists predicted seasonal weakness and immigration policy would produce even softer numbers.

Treasury yields spiked Friday, as did the odds that the Federal Reserve will raise interest rates later this month. A September hike was considered a coin toss yesterday, but traders now see a 58% chance that policymakers raise rates by a quarter point later this month. “Overall, these solid job numbers should further tip the Fed to hiking rates, either in this month’s meeting or the following one in October,” says Morningstar senior US economist Preston Caldwell.

August Jobs Report Key Stats

• Total nonfarm payrolls rose 162,000 after rising by a revised 21,000 in July.
• The unemployment rate was unchanged at 4.1%.
• Average hourly earnings rose by 10 cents, or 0.3%, to $37.75.

August’s Job Numbers Were Strong Across the Board

August’s payroll strength was broad-based. Jeff Schulze, chief investment strategist at Franklin Templeton Institute, called the print “unambiguously strong,” noting the diffusion index—a measure of how job growth is distributed across the economy—reached its best level since 2024.

Growth was especially strong in leisure and hospitality, which added 62,000 jobs, nearly offsetting the prior two months’ losses of 75,000. Food services and drinking establishment payrolls grew by 59,000, blowing past the average monthly gain of 12,000 over the past year. Local government education added 42,000 jobs, nearly erasing July’s unexpectedly large decline. Information and financial services were the only industry groups to shed jobs last month, losing 23,000 and 11,000, respectively.

A Relatively Encouraging Report

Friday’s unexpectedly strong data “support[s] a picture of a stronger job market than we thought a month ago,” says Morningstar’s Caldwell. Over the past three months, payrolls have grown at an average annualized rate of 0.54%, “a major strengthening from a month ago, when three-month growth stood at just 0.15%.”

Economists were especially encouraged by the low unemployment rate, which some experts expected to rise as hundreds of thousands of workers who stopped looking for work earlier in the summer resumed their searches. Friday’s report suggests many reentered the workforce, but the unemployment rate held steady at a historically low 4.1%. “It was really encouraging to see the participation rate up two-tenths of a percent,” says Mike Reynolds, vice president of investment strategy at Glenmede.

Several additional data points suggested the unemployed, who have been grappling with a stagnant job market for years, may be getting a reprieve. The U-6 unemployment rate declined to 7.7% from 7.9%, “confirm[ing] that the job market is improving for job seekers,” says Bill Adams, chief US economist at Fifth Third Commercial Bank. He also points to the unemployment rate for Black and African American workers, which dropped to 6.0% from 6.3% and “often serves as a bellwether of trends in the broader labor market.”

That said, some experts caution about reading too much into August’s numbers. “This month looks strong almost because last month looked weak,” says Reynolds, pointing to the sharp rebound in local government education hiring. “Payrolls we know are just notoriously noisy,” he adds, warning against “trying to get too much signal out of the noise.”

All Eyes on Inflation Ahead of Next Fed Meeting

The Fed had already signaled that of its two primary remits (inflation and employment), it’s more worried about rising prices. Friday’s report likely only honed that focus. “The August payroll release quelled any lingering labor fears,” says Franklin Templeton’s Schulze, “putting next week’s inflation data firmly in the driver’s seat for the [Federal Open Market Committee’s] rate decision later this month.”

Friday’s report puts slightly more pressure on the Fed to raise interest rates in the coming months, according to Morningstar’s Caldwell.

Improving labor market trends are “nudging up the probability of a September hike slightly,” says Bradford Smith, portfolio manager at Janus Henderson Investors.

Others see the print having a greater impact. Signs of an uncertain job market are “one reason [policymakers] weren’t raising rates more quickly to fight inflation,” says Chris Zaccarelli, chief investment officer at Northlight Asset Management. After Friday’s report, “there are plenty of reasons to raise interest rates [to fight inflation] and fewer reasons to keep rates unchanged [to support the labor market].”

The federal funds rate target range has been 3.50%-3.75% since December. Investors see about a 58% chance that the Fed will lift that range to 3.75%-4.00% at its next meeting on Sept. 16, according to CME Group’s FedWatch Tool. Traders estimate a 41% chance that rates stay at that level through the end of the year, but they put the odds of at least one more hike in 2026 at 44%.