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WASHINGTON (Reuters) - U.S. employers likely hired the fewest workers in nearly two years in October and increased wages at a moderate pace, suggesting some loosening in labor market conditions, which would allow the Federal Reserve to shift towards smaller interest rates increases starting in December.

The Labor Department's closely watched employment report on Friday is also expected to show unemployment ticking up to 3.6% from 3.5% in September. The Fed on Wednesday delivered another 75-basis-point interest rate hike and said its fight against inflation would require borrowing costs to rise further.

But the central bank signaled it may be nearing an inflection point in what has become the fastest tightening of monetary policy in 40 years.

"The labor market is basically OK, but it does seem to be slowing," said Guy Berger, principal economist at LinkedIn

in San Francisco. "The Fed is going to try to thread the needle where they slow down the labor market enough to put downward pressure on wages and inflation, without causing a recession."

Nonfarm payrolls likely increased by 200,000 jobs last month after rising 263,000 in September, according to a Reuters survey of economists. That would be the smallest gain since December 2020, when payrolls declined under an onslaught of COVID-19 infections. Estimates ranged from 120,000 to 300,000.

Employment gains were probably almost evenly distributed among industry sectors, in line with recent patterns, with the leisure and hospitality industry leading the way. Leisure and hospitality employment remains below its pre-pandemic level by at least a million jobs. Interest rate-sensitive industries like financial activities as well as transportation and warehousing probably shed jobs as they did in September. Government payrolls are seen declining further.

Hurricane Ian is expected to have put a small dent in payrolls. The storm slammed into Florida in late September and boosted unemployment claims in mid-October, when the government surveyed businesses for last month's employment report.

"Hurricane Ian should have at least some downward impact on nonfarm payrolls," said Lou Crandall, chief economist at Wrightson ICAP (LON:NXGN) in Jersey City. "We have lowered our forecast slightly to show an increase of 150,000 (from 200,000) on the assumption that at least some workers were sidelined in the areas hit hardest by the hurricane."