The rise in compensation reported on Tuesday by the Labor Department was slightly stronger than expected and helps to explain the surge in consumer spending last quarter, which contributed to the fastest economic growth pace in nearly two years.

Fed officials were due to start a two-day policy meeting on Tuesday. The U.S. central bank is expected to leave interest rates unchanged but maintain its hawkish bias at the conclusion of that meeting as a recent spike in U.S. Treasury yields and stock market sell-off have tightened financial conditions.

"Wages continue to rise at an elevated pace, too high for Fed officials," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "Policymakers will likely keep the option of another rate hike on the table and will recommit to maintaining a restrictive policy stance for some time." The Employment Cost Index (ECI), the broadest measure of labor costs, rose 1.1% last quarter after increasing 1.0% in the April-June period, the Labor Department's Bureau of Labor Statistics reported.

Economists polled by Reuters had forecast the ECI would rise 1.0%. Labor costs increased 4.3% on a year-on-year basis after advancing by 4.5% in the second quarter. The report followed on the heels of news last week that the economy grew at its fastest pace in nearly two years in the third quarter.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes. Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.

Growth in annual compensation is gradually slowing after peaking last year, in line with some easing in labor market conditions.

Wages increased 1.2% in the third quarter after climbing 1.0% in the prior three months. They were up 4.6% on a year-on-year basis after advancing by the same margin in the second quarter. Wage growth continues to exceed pre-pandemic rates.

Private-sector wages gained 1.1% after rising 1.0% in the April-June quarter. They advanced 4.5% on a year-on-year basis.

State and local government wages shot up 1.8% after increasing 0.8% in the prior quarter. They were driven by rises in education and health services as well as public administration. State and local government wages increased 4.8% on a year-on-year basis.

Inflation-adjusted wages for all workers rose 0.9% on a year-on-year basis after jumping 1.7% in the second quarter. Benefits rose 0.9% last quarter after climbing by the same margin in the April-June period. They increased 4.1% on a year-on-year basis.