The tepid August employment report is likely to fuel continued debate within the Federal Reserve over whether the economy is strong enough for higher short-term interest in the months ahead, possibly lending weight to the case for waiting a bit longer before moving.
Employers added 151,000 jobs last month, down from a robust gain of 275,000 jobs in July. Revisions showed U.S. employers added 1,000 fewer jobs in June and July than previously estimated, but the total gains those months remained strong.
The sharp slowdown in hiring last month doesn't take a September rate increase off the table. Month-to-month employment data can be choppy and is subject to revisions. Over the past three months, job gains have averaged a healthy 232,000 a month.
Fed Chairwoman Janet Yellen said a week ago in Jackson Hole, Wyo. that the case for raising short-term interest rates "has strengthened in recent months" given the labor market's solid performance and prospects for economic growth. Her comments signaled a move at the Fed's Sept. 20-21 meeting was clearly possible, but her colleagues have expressed mixed views.
Some Fed officials, including governors Daniel Tarullo and Lael Brainard, have indicated in the past they want to see convincing signs that inflation is rising before they move rates up again and thus they would likely be inclined to wait.
Others, including Vice Chairman Stanley Fischer and a number of regional bank presidents, see inflation already near their 2% goal and an improving job market, which could justify a quarter-percentage-point move when the Fed next meets.
Financial market participants lowered their expectations that the Fed will move its benchmark federal-funds rate off the range of 0.25% to 0.50% in September, with fed-funds futures on Friday morning after the employment report was released suggesting a 21% chance of rates rising a quarter percentage point this month, compared with 24% a day earlier, according to CME Group.
Ahead of the release, some analysts cautioned that August payrolls tend to undershoot estimates, mainly due to difficulties with seasonal adjustment factors. However, the employment report is the last broad measure of the labor market's health Fed officials will see before their next meeting.
The August jobless rate held steady at 4.9%, just above a postrecession low touched in May and in the range most Fed policy makers view as the longer-run average. Barclays Research economists said labor markets "squeak past [the] threshold" for a September rate increase based on the August data.
Still, the weaker-than-expected report increases uncertainty surrounding the September meeting, analysts said. That puts added focus on speeches next week by two regional Fed presidents, San Francisco's John Williams and Boston's Eric Rosengren, who this year has a vote on the interest-rate-setting Federal Open Market Committee.
The August employment report "should not derail the possibility for a rate action at the upcoming FOMC meeting, although it may temper the likelihood," said Gregory Daco of Oxford Economics in a note to clients.
A relatively bright spot for workers in August's report were wage increases. Average hourly earnings for private-sector workers rose by three cents, or 0.1%, in August from July to $ 25.73. From a year earlier, average hourly earnings were up 2.4%. That is a slight slowdown from the prior month's annual gain, but still well outpaces mild inflation.
While the employment report offered optimistic signals that longer-run employment trends remain strong, recent data on the health of the economy have been mixed.
Consumer spending, a key driver of U.S. economic growth, rose in July at a solid pace for the fourth straight month.
A measure of homes under contract for sale rose also in July, a sign of steady demand amid low interest rates and rising employment.
However, inflation remains sluggish—a potential hurdle to Fed officials as they mull whether to raise short-term interest rates. The personal-consumption expenditures price index, the Fed's preferred inflation measure, was flat in July from the prior month. From a year earlier, the index was up 0.8%, its smallest annual increase since March.
Federal Reserve Bank of Minneapolis President Neel Kashkari said Wednesday that he wants to see core inflation, which excludes volatile food and energy prices, tick up before making a call on whether the central bank should raise interest rates.
"I'm very interested to see core inflation increasing," Mr. Kashkari told The Wall Street Journal. "We haven't seen it yet. That is what I'm looking for."
Nor has economic growth been stellar. The Commerce Department recently revised lower its second-quarter reading of inflation-adjusted gross domestic product growth to a 1.1% seasonally adjusted annual rate, down slightly from its initial estimate of a 1.2% growth pace.
The manufacturing sector also continues to struggle. On Thursday, the Institute for Supply Management's gauge of U.S. factory activity showed it contracted in August after five months of expansion.
Write to Harriet Torry at harriet.torry@wsj.com
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