US Labor Costs Rise at Slowest Pace Since Mid-2021, Fueling Rate Cut Hopes
The Q3 Employment Cost Index rose 0.8%, below forecasts, signaling an easing of wage pressures that could give the Federal Reserve leeway to lower borrowing costs.
A key measure of U.S. labor costs rose at its slowest pace in over four years, providing fresh evidence that wage pressures are cooling and reinforcing investor expectations for a Federal Reserve interest rate cut.
The Employment Cost Index (ECI), a broad gauge of wages and benefits tracked closely by the central bank, climbed 0.8% in the third quarter, the Labor Department reported Tuesday. This was below the 0.9% consensus estimate from economists and marks the most modest advance since the second quarter of 2021.
The data sent a positive signal through markets, as moderating compensation growth is considered a crucial element in the Federal Reserve's battle to bring inflation back to its long-term target. For months, Fed officials have pointed to the tight labor market and rapid wage gains as a key driver of persistent price pressures, particularly in the services sector.
The softer-than-expected ECI reading is seen as one of the final significant data points ahead of the Fed's policy meeting, and it appears to solidify the case for a reduction in borrowing costs. Market sentiment now overwhelmingly anticipates a quarter-point cut to the benchmark federal funds rate, which would be the central bank's final move of the year.
"This report should ease any lingering inflation worries at the Fed and gives them the green light to proceed with a rate cut," one analyst noted. The moderation in labor costs provides policymakers with greater flexibility for future adjustments, allowing them to lower rates without significant fear of reigniting inflation.
Following the release, Treasury yields ticked lower as traders priced in a more dovish path for monetary policy. While stock market reaction was measured, the data supported the broader narrative of a soft landing for the economy, where inflation subsides without a sharp economic downturn.
The Federal Reserve has held interest rates in restrictive territory for over a year to combat the sharpest surge in inflation in four decades. The ECI is a favored metric for Fed Chair Jerome Powell and the board because it is not distorted by shifts in the composition of the workforce, offering a cleaner read on underlying wage inflation.
While the market is confident in a rate cut, some analysts suggest the central bank may deliver a "hawkish cut." In this scenario, the Fed would lower rates but simultaneously signal a potential pause into early 2026, emphasizing that its decisions will remain dependent on incoming economic data. According to commentary ahead of the decision, such a move would be intended to manage market expectations and prevent an over-enthusiastic rally that could itself have inflationary effects.
Investors and economists will now turn their full attention to the Federal Reserve's official statement and subsequent press conference, parsing the central bank’s language for clues on its policy trajectory for the coming year.