Federal Reserve Chairman Jerome Powell says the link between unemployment and inflation may be resting rather than poised for a revival. The jobless rate’s decline to a 48-year low will put that view to the test.

While unemployment fell more than forecast in September to 3.7 percent, the lowest since December 1969, average hourly earnings climbed 2.8 percent from a year earlier, slowing as projected from a 2.9 percent advance the prior month, a Labor Department report showed Friday. Hiring eased to 134,000, reflecting the fallout from Hurricane Florence, with 299,000 people being away from work due to bad weather.

The figures suggest the job market remains tight — with hiring outpacing labor-force growth and perhaps pushing the economy beyond full employment — though it’s yet to spark a significant acceleration in wages. The coming months will indicate whether pay gains and prices will finally surge in response to a historically low unemployment rate, a development Powell says he doesn’t expect.

“The jobs report these days has become more about inflation than payrolls,” and “the big picture should ease concerns about inflation,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “Wages are creeping higher, not accelerating,” he said, adding “this report should keep the Fed on their current course, of one hike per quarter.”

The latest jobless-rate drop pushed it further below Fed estimates of levels sustainable in the long run, reinforcing expectations for a fourth interest-rate hike this year and more in 2019. While the trade war with China poses a risk, policy makers are likely to keep raising borrowing costs as President Donald Trump’s tax cuts are juicing economic growth and supporting demand for labor, though employers are lifting worker pay only gradually.

Market Reaction

Following Friday’s report, Treasury yields rose to seven-year highs amid speculation the figures will clear the path for higher interest rates.

“I do not see it as likely that the Phillips curve is dead, or that it will soon exact revenge,” Powell said in a speech to economists on Tuesday, referring to the theory that lower unemployment spurs higher inflation.

The report keeps alive the debate about how much slack may still be left in the labor market, and whether the reality matches the Fed’s own estimates of the jobless rate under which inflation would start picking up — the so-called non-accelerating inflation rate of unemployment, or Nairu.

“If the labor market were as tight as implied by the Fed’s estimate of full employment, job growth this strong would likely place significant upward pressure on wages,” Mickey Levy, chief U.S. and Asia economist at Berenberg Capital Markets LLC in New York, said in a note. “As business demand for workers continues to rise, attractive wages and benefits are luring a growing number of persons from the sidelines back into the workforce.”

Some companies are starting to boost wages — Amazon.com Inc. being among the latest to pledge raises — to attract or retain workers.

Analysts chalked up the slower hiring to the hurricane and pointed to strength in revisions, which added a total of 87,000 jobs to payrolls in the previous two months. The August gain rose to 270,000, bringing the three-month average to 190,000. Hiring data may show storm-related swings for October too, economists said.

“I would view this as a full-employment jobs report,” Alan Krueger, a Princeton University economics professor and former head of the White House Council of Economic Advisers under Barack Obama, said on Bloomberg Television. “It’s going to reinforce the Fed’s path for raising rates.”

The fallout from Florence, which made landfall in North Carolina on Sept. 14, was apparent in employment at restaurants and bars, an industry where most workers only get paid if they show up to work. That category saw an 18,200 decrease in payrolls, according to the report.

What Our Economists Say

Hurricane Florence had a notable impact on the September jobs report. This not only deflated the monthly payroll change, it also showed up in outsized wage pressures for the construction and utility sectors. Weather-related absences and curtailments also took a toll on the tally of aggregate hours worked. The most direct evidence of the hurricane’s impact showed up in the elevated number of workers who reported reduced hours due to bad weather — this metric was over six times larger than what is normal for September.– Carl Riccadonna, Yelena Shulyatyeva and Tim Mahedy, Bloomberg Economics Read more in the full reaction note.

Average hourly earnings rose 0.3 percent from the prior month, matching estimates, following a downwardly revised 0.3 percent gain. The annual advance of 2.8 percent matched economist projections for some cooling in the year-over-year rise, as a strong number for September 2017 wages presented a difficult comparison.

Some measures showed the labor market may still have some room for further improvement. The U-6, or underemployment rate, edged up to 7.5 percent from 7.4 percent. That gauge includes part-time workers who’d prefer a full-time position and people who want a job but aren’t actively looking.

The prime-age participation rate, or share of people 25 to 54 years old in the labor force, fell to 81.8 percent in September, and has ticked down in all except three months this year.