The US economy showed a notable slowdown in job creation at the start of the summer, according to a report released Thursday by the Bureau of Labor Statistics, a development that strengthened investor expectations that the Federal Reserve will not need to raise interest rates in the near term.

Nonfarm payrolls increased by 57,000 jobs in June on a seasonally adjusted basis, following a downwardly revised gain of 129,000 in May. The result came in below the Dow Jones consensus forecast of 115,000 jobs.

Meanwhile, the unemployment rate fell to 4.2%, compared with 4.1% a year earlier.

Labor force participation declines as prior data are revised lower

The decline in the unemployment rate was driven largely by a drop in labor force participation, which fell by 0.3 percentage points to 61.5%, its lowest level since March 2021.

The household survey also showed a sharp deterioration in employment, with the number of employed people falling by 507,000 during the month. The broader measure of unemployment, which includes discouraged workers and those working part-time for economic reasons, declined by 0.2 percentage points to 7.9%.

Previous months data were revised lower as well. May payroll growth was cut by 43,000 jobs after originally coming in well above economists expectations, while April payrolls were revised down by 31,000 to 148,000 jobs, indicating that labor market growth had been considerably weaker than previously believed.

Average hourly earnings rose 0.3% in June and were up 3.5% from a year earlier, in line with market expectations.

Professional and business services led job gains, adding 36,000 positions. Social assistance employment increased by 25,000 jobs, while healthcare added 22,000 jobs, although that growth came at a slower pace than is typical for the sector. Government employment also increased by 8,000 jobs.

By contrast, the leisure and hospitality sector lost 61,000 jobs, which the Bureau of Labor Statistics attributed to weaker-than-usual seasonal hiring. There had been expectations that the World Cup would provide a boost to employment, with Goldman Sachs estimating the event could add around 40,000 jobs.

Most other sectors saw little change in employment levels.

Markets scale back rate hike expectations as the Fed faces a more complex labor picture

US stock futures rose following the report as traders reduced expectations for a possible interest-rate increase as early as September.

At the same time, US Treasury yields declined, with the policy-sensitive two-year yield falling 3.5 basis points to 4.13%.

Seema Shah, Chief Global Strategist at Principal Asset Management, said: The slowdown in job growth undermines the narrative that had been developing in recent months that the labor market was regaining strength. At the same time, it reinforces the view that the Federal Reserve is under little pressure to tighten monetary policy further.

The report comes at a time when Federal Reserve officials have expressed mixed views on the US economy. Policymakers have remained relatively optimistic about growth while continuing to worry about inflation, after earlier concerns over labor market weakness had eased. However, Thursdays weak employment data could prompt policymakers to reassess labor market conditions.

Federal Reserve Chairman Kevin Warsh described the labor market as stable during a media appearance on Wednesday, while reiterating the importance of returning inflation to the central banks 2% target.

Inflation has remained above that level for nearly five years, with the latest increase driven in part by the war with Iran and the ongoing effects of tariffs.

These numbers are fine for the Federal Reserve, said Thomas Simons, Chief Economist at Jefferies, in a research note. Job growth remains sufficient to keep the unemployment rate stable, while wage growth remains solid without accelerating. There is no urgent need to take immediate action on interest rates, and the slower pace of payroll growth suggests that a rate hike this year has become highly unlikely.

Markets expect the Federal Reserve to leave interest rates unchanged throughout the summer. Following the jobs report, traders largely ruled out a rate increase at the September meeting, although futures markets still imply some probability of a hike in October, according to the CME FedWatch Tool.

For his part, Kevin Warsh has avoided providing forward guidance on the future path of interest rates, repeatedly emphasizing since taking office that he is not committed to any predetermined policy course.

In separate labor-market data released Thursday, initial jobless claims fell to 215,000 on a seasonally adjusted basis in the week ended June 27, down by 1,000 from the previous week and below market expectations of 220,000.