The US labor market added more jobs than expected in June while the unemployment rate unexpectedly rose, reaching its highest level since November 2021, another sign that the job market continues to cool.

Data from the Bureau of Labor Statistics released Friday showed the US economy added 206,000 nonfarm payroll jobs in June, more than the 190,000 expected by economists.

The unemployment rate rose to 4.1%, up from 4% in the month prior and the highest reading in almost three years. June's job additions were a slight decline from May, which saw job gains revised down on Friday to 218,000 from the 272,000 initially reported last month. Total revisions for April and May showed the US economy added 111,000 fewer jobs than initially reported.

"The June jobs report showed more signs of cooling in the labor market, with job growth including revisions weaker than expected, the unemployment rate rising and earnings growth slowing," Oxford Economics lead US economist Nancy Vanden Houten wrote in a note to clients.

The S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) rose following the report, adding to gains after the market traded to record highs earlier this week amid a slew of softer-than-expected economic data, including readings on inflation that have the US pacing back toward a "disinflationary path," according to Federal Reserve Chair Jerome Powell.

Read more: How does the labor market affect inflation?

Ahead of Friday's jobs report, investors were pricing in two interest rate cuts this year, with the first most likely to come in September.

According to the CME FedWatch Tool, investors are pricing in a nearly 75% chance the Fed cuts rates in September. Last month, Fed forecasts suggested one rate cut would likely be appropriate this year.

To some, Friday's report further strengthens the case for Federal Reserve interest rate cuts in the near future.

"Today's employment report ought to firm up expectations of a September rate cut," Renaissance Macro's head of economics Neil Dutta wrote in a note to clients. "Economic conditions are cooling and that makes the trade-offs different for the Fed ... Powell should use July to set up a September cut."

With unemployment claims rising and the unemployment rate at its highest level in more than two years while inflation is falling, economists believe the Fed is walking an increasingly fine line by keeping interest rates at their highest levels in more than two decades.

"Given the cooling evident over the past year in the labor market, we see further labor market weakening as becoming more worrisome and less welcomed by the Fed," Wells Fargo senior economist Sarah House wrote in a note to clients on Tuesday.

Data out earlier this week also showed signs of a slowdown in the labor market.

On Wednesday, the ADP Research Institute's National Employment Report showed 150,000 jobs were added to the private sector in June, a deceleration from the 157,000 job additions in May.

Meanwhile, data from the Department of Labor showed nearly 1.86 million continuing unemployment claims were filed in the week ending June 29, up from 1.83 million the week prior. This marked the ninth straight week where continuing claims have risen.

Elsewhere in Friday's report, wage growth, an important measure for gauging inflation pressures, slowed to 3.9% year over year. On a monthly basis, wages increased 0.3%, a decrease from the previous month's 0.4% gain.

Meanwhile, the labor force participation rate picked up to 62.6% from 62.5% the month prior.

The largest job increases in Friday's report were in government employment, which added 70,000 jobs in June. At the same time, healthcare employment added 49,000 jobs, lower than the average monthly gain of 64,000 over the last twelve months.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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