Sign up for the Economics Daily newsletter to discover what’s driving the global economy.

U.S. 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.

According to Bureau of Labor Statistics data, nonfarm payrolls rose by 142,000 last month, leaving the three-month average at the lowest since mid-2020. 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.

Treasury yields fluctuated as traders boosted bets that Fed officials could reduce interest rates by a half percentage point at their upcoming meeting to guard against sustained weakness in hiring. The S&P 500 index opened higher and the dollar was little changed.

“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.

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%.

In prepared remarks published after the release of the jobs numbers, New York Fed President John Williams said it is now appropriate for the central bank to reduce interest rates, given progress on lowering inflation and a cooling in the labor market. Fed Governor Christopher Waller and Chicago Fed President Austan Goolsbee are scheduled to speak later Friday.

“There are two roads they 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,” said Laura Rosner-Warburton, a partner at MacroPolicy Perspectives.

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

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