WASHINGTON — Jobs grew at an unexpectedly gentle rate during August while wages rose moderately, news that triggered sharp rallies Friday in stock and bond markets in the hope that a possible slowdown will hold inflation in check.

The Labor Department said the economy spun off only 124,000 new jobs in August, the smallest increase since May but still enough to push the unemployment rate down a notch to 4.2%. Non-farm workers' hourly earnings rose only 0.2% to $13.30, up 2 cents from July.

Investors, apparently reading the news as a sign that the Federal Reserve would not have to raise interest rates again soon to control inflation, drove stock and bond prices sharply higher.

But some analysts say that judgment may be premature.

The U.S. unemployment rate was reported at 4.2%, in line with projections. The figure has wavered between 4.2% and 4.3% since March, this country's lowest unemployment rate in 29 years.

Such low unemployment has, in the past, given rise to wage pressure and inflation, and the absence of this usual cause-and-effect relationship in the current economy has given rise to debate about what, if anything, the Fed should do.

Since February, the Fed has been on a hair-trigger alert for signs that inflation has begun to incubate. Twice this summer it raised interest rates in preemptive strikes that some economists called unnecessary.

Fed Chairman Alan Greenspan has said that, of all the indicators helping to shape his thinking on interest rates, he is watching labor-market statistics most intently. Friday's figures are considered crucial because they were the last such figures to be published before the Fed's policymaking committee next meets on Oct. 5.

So when the Labor Department announced that hourly wages remained in check, investors concluded that Fed policymakers would go into their meeting with no compelling reason to raise interest rates. A powerful rally on Wall Street began as soon as the markets opened Friday morning, pushing up the Dow Jones industrial average by 235 points, to 11,078.

"It just seems like they overreact to everything," said David M. Jones, an economist at the bond firm of Aubrey G. Lanston. "As soon as there's a little bit of grounds for optimism, the market just explodes."

Jones, who calls himself more of a hawk on inflation than the overall market, said that, before Friday's weak job report, various agencies had been releasing a string of lower-profile statistics that pointed to rising inflationary pressure.