The U.S. labor market remains fairly robust and added more than 700,000 net new jobs during the third quarter of 2023.

In recent months, the U3 unemployment rate rose slightly to 3.8 percent, while the labor force participation rate held steady at approximately 62.8 percent. 

Average hourly earnings increased 42% from a year earlier. 

With interest rates rising in recent years, many economists expected a slowdown in job creation and a higher unemployment rate, Touchstone Funds Group Trust relates. 

But it adds that hasn’t happened yet, and the U.S. labor market has consistently posted stronger-than-expected results, supporting the narrative of higher and longer-term interest rates.

With respect to monetary policy, a strong labor market combined with higher than desired inflation resulted in a shift to tighter monetary policy by the Fed in early 2022. 

Throughout 2022, the Fed increased the federal funds rate by 425 basis points. As inflation readings moderated over time, the Fed reduced the level of rate hikes from 75 basis points to 25 basis points. 

On the other hand, the Federal Reserve began reducing the size of its balance sheet through quantitative tightening in June 2022.

Labor market

The Federal Reserve continued its tighter monetary policy in 2023 and raised the Fed Funds rate another four times (25 basis points each time) earlier this year. 

The Federal Open Market Committee (FOMC) met during September 2023 and left the Fed Funds rate unchanged at 5.25-5.5 percent.

Longer-term yields moved higher in recent months (10-year Treasuries ended the period at approximately 4.6%), but the yield curve remains inverted. Lower long-term yields relative to short-term yields suggest weaker economic growth or lower inflation in the future, while higher short-term rates reflect the Fed’s attempts to curb the rate of inflation and balance the tight labor market.