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US hiring fell short of forecasts in August after downward revisions to the prior two months, a development likely to fuel ongoing debate over how much the Federal Reserve should cut interest rates.

Nonfarm payrolls rose by 142,000 last month, leaving the three-month average at the lowest since mid-2020, Bureau of Labor Statistics data showed Friday. The unemployment rate edged down to 4.2%, the first decline in five months, reflecting a reversal in temporary layoffs.

The median forecast in a Bloomberg survey of forecasters called for 165,000. Bloomberg Economics predicted 145,000.

In remarks after the release of the jobs numbers, Fed Governor Christopher Waller said the latest batch of data “requires action,” adding that he would advocate for “front-loading rate cuts if that is appropriate.”

The yield on two-year Treasuries declined after Waller’s remarks were released. Pricing in futures markets signaled investors boosted bets the Fed will lower rates by a half point this month, and they now expect at least a full percentage point in easing by the end of 2024.

“The labor market is clearly softening, and the Fed needs to step in to cut off tail risks,” Sonu Varghese, a global macro strategist at Carson Group, said in a note after the release. “The report seals the deal for a September rate cut, but the big question really is whether the Fed goes big.”

Other reports suggest the job market is losing steam. While layoffs remain largely subdued, many companies are putting off expansion plans amid high borrowing costs and uncertainty ahead of the November presidential election. A Fed survey of regional businesses published Wednesday indicated employers have become more selective in hiring in recent weeks, with some cutting hours and leaving open positions unfilled.

What Bloomberg Economics Says...

“The slight improvement in the unemployment rate suggests things have improved, but large downward revisions to July data and the disappointing NFP print — even when adjusted for the estimated overstatement — means jobs creation was probably flat in July, and barely positive in August. Powell may not be able to convince other Fed officials to vote for jumbo rate cut after this print.”

— Bloomberg economists led by Anna Wong

To read the full note, click here

Hiring was weighed down by job losses in the manufacturing, retail trade and information sectors. The education and health care sector — one of the biggest drivers of hiring in the post-pandemic period — boosted headcount by the least since 2022.

Total private-sector payrolls rose by 96,000 on average over the last three months, marking the first time that number fell below 100,000 since the onset of the pandemic.

While the overall unemployment rate edged lower, the so-called underemployment rate — which includes those working part-time for economic reasons and discouraged workers — rose to 7.9%, the highest since October 2021.

The participation rate — the share of the population that is working or looking for work — was unchanged at 62.7%. The rate for workers ages 25-54, also known as prime-age workers, edged lower for the first time since March.

Fed officials also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. Average hourly earnings rose 3.8% from a year ago. Wages for production and nonsupervisory employees, which covers the majority of workers, advanced 4.1%.

Laura Rosner-Warburton, a partner at MacroPolicy Perspectives, said there are “two roads” the Fed could take: “Steady 25-basis-point cuts with a commitment to do more if the labor market shows signs of additional cooling — which it did today — or you go in with larger increments and try and downplay the negative signal.”

“There are two paths,” she said. “We feel on the fence with this report. It leans toward 50.”

--With assistance from Chris Middleton, Michael Mackenzie, Mark Niquette and Craig Torres.

(Updates with comments from Fed’s Waller in fourth paragraph.)