U.S. stocks fell and Treasury yields rose Friday after the government reported that employers unexpectedly added 162,000 jobs in August, raising prospects of an interest rate increase. The S&P 500 fell 0.4%, eking out a modest weekly gain. The Dow Jones Industrial Average dropped 0.5%, and the Nasdaq composite lost 0.3%.

The hiring surge far exceeded the 65,000 forecasters had expected, according to a FactSet poll. Labor Department revisions added 55,000 jobs to June and July payrolls, while the unemployment rate held steady at 4.1%. The strong report could give Federal Reserve policymakers leeway to raise the benchmark short-term rate at their Sept. 16 meeting.

"Today's jobs report does lean toward the Fed increasing rates," said Terry Sandven, chief equity strategist at U.S. Bank Asset Management Group. Expectations for a September rate hike climbed to 60.4% on Friday, up from 49.4% Thursday, according to CME FedWatch. Jeffrey Roach, chief economist for LPL Financial, called a hike "increasingly likely."

Wall Street expects the Fed to act before year-end to cool inflation running above 3%, fueled by rising oil prices amid the U.S. war with Iran. August CPI figures, due Sept. 11, are expected to show a 3.4% annual rise. Fed Chair Kevin Warsh signaled at Jackson Hole that more work may be needed, while Governor Christopher Waller said he would consider a hike if inflation runs hot. The 10-year Treasury yield rose to 4.78%.