Stocks fall after a surprisingly strong jobs report raises prospects of an interest rate hike

U.S. stocks fell and Treasury yields rose Friday after the government reported that employers unexpectedly added 162,000 jobs last month, a development that could increase chances that the U.S. central bank will raise interest rates later this month.

The S&P 500 fell 0.4%, though it managed to eke out a modest gain for the week. The Dow Jones Industrial Average fell 0.5%, and the Nasdaq composite gave back 0.3%.

Wall Street expects the Federal Reserve to raise interest rates before the year ends in an effort to cool inflation, which has been running hot due to rising oil prices amid the U.S. war with Iran and remains well above 3%. The Fed has a stated goal of cooling inflation to a target of 2%.

The surprise increase in hiring last month could give the central bank's policymakers leeway to raise the Fed's benchmark short-term interest rate to fight inflation at their next policy meeting in less than two weeks.

"Today's jobs report does lean toward the Fed increasing rates," said Terry Sandven, chief equity strategist at U.S. Bank Asset Management Group, noting, however, that a rate hike is "not a foregone conclusion."

The Labor Department reported that hiring in August far exceeded the 65,000 forecasters had expected, according to a poll by FactSet. Labor Department revisions also looked good, adding 55,000 to June and July payrolls. The unemployment rate held steady at 4.1%.

The stronger jobs market could make matters more complicated for the Fed, which has to balance supporting job growth with fighting inflation. Raising interest rates can help tame inflation, but it can also slow economic growth as borrowing costs rise for households and businesses.

Expectations for a rate hike in September increased to 60.4% on Friday following the release of the jobs report, up from 49.4% Thursday and from 57% a week ago, according to CME FedWatch.

"Given the strength of the payroll report, a rate hike on Sept. 16 appears increasingly likely," according to Jeffrey Roach, chief economist for LPL Financial. "Ironically, a rate hike may generate less market volatility than another meeting in which policymakers choose to stand pat."

The government will release August inflation figures Sept. 11, shortly before the Fed's policymaking committee's next meeting, which ends on Sept. 16. The closely watched consumer price index, or CPI, which measures costs for consumers, is expected to show that inflation rose last month at a 3.4% rate, the same as in July. Inflation has held stubbornly above 3% for most of the year.

"With the August CPI report now on deck, the question is whether the combined impact of stronger-than-expected hiring and a stiff inflation tail wind will push policymakers to the tipping point of raising rates later this month," said Jim Baird, chief investment officer with Plante Moran Financial Advisors.

Fed Chair Kevin Warsh said last week at the Fed's annual economic symposium in Jackson Hole, Wyoming, that inflation had not shown sufficient improvement and that the central bank might have "more work to do," a sign he is weighing a rate increase at the Fed's next meeting.

On Thursday, Federal Reserve governor Christopher Waller said that if new data next week shows inflation is cooling, he "would be inclined" to keep the Fed's benchmark interest rate unchanged. Should the data show hotter inflation, he would consider a rate hike.

U.S. government bond yields, which had eased the last couple of days, rose as the bond market weighed the implications of the jobs report.

The yield on the 10-year Treasury, which influences mortgage rates, rose to 4.78% from 4.77% late Thursday. It has been rising steadily throughout the year and was as low as 4.20% at the beginning of 2026.

The yield on the 2-year Treasury, which closely tracks expectations for Federal Reserve moves on interest rates, rose to 4.37% from 4.34%. It remains significantly higher for the year, though, and was as low as 3.50% at the beginning of 2026.

Meanwhile, gains in technology stocks helped limit declines in other sectors Friday. Nvidia rose 0.8%, Advanced Micro Devices added 4.7%, Sandisk jumped 11.9% and Micron Technology gained 6.1%.

Lululemon Athletica sank 17.4%, the biggest decline among S&P 500 stocks, after the retailer reported quarterly revenue that fell short of analysts' estimates and lowered its fiscal full-year outlook again.

All told, the S&P 500 fell 29.11 points to 7,718.60. The Dow dropped 271.86 points to 53,414.25, and the Nasdaq lost 77.07 points to close at 26,506.99.

Markets ended mixed in Europe and Asia.

In energy markets, oil rose Friday, adding to a sharp run-up in prices earlier in the week as the six-month long U.S. war with Iran intensified. Iran fired at Kuwait on Thursday in retaliation for U.S. bombardments earlier in the week. The Strait of Hormuz remains effectively closed.

The price of Brent crude, the international standard, rose 0.8% to settle at $96.28 a barrel. Benchmark U.S. crude rose 0.2% to settle at $91.48 a barrel. For the week, they are up 9.2% and 9.7%, respectively.

U.S. gasoline prices will be higher this weekend than they have ever been at this time of year, according to AAA.

Diesel hit an all-time high for any time of the year on Friday, soaring to an average of $5.85 a gallon. Because diesel is used for many freight and delivery networks, higher diesel prices mean higher transportation costs for a long list of everyday goods, a price shock that can impact prices for consumers.

U.S. stock markets will be closed Monday for the Labor Day holiday.