The June payroll report does little to clarify the economic outlook for the Fed. The headline was softer than anticipated after several months of unexpectedly brisk gains. Yet the unemployment rate ticked down to 4.2%, largely because the labor force shrank. That makes the drop in unemployment a supply-side story rather than a sign of strong hiring.
Underneath the month-to-month gyrations, however, trend hiring has firmed: the six-month private-sector average of 88,000 is near its best run rate in two years. Hawks will read the trend and the falling jobless rate as a labor market in good shape, consistent with their view that the Fed should be more focused on inflation.
The bigger question is whether the trend is conclusive enough to pull anyone toward a hike who wasn't already leaning that way. Investors in interest-rate futures said the answer is no. They put the odds of a July hike at roughly one in five, down from about one in three before the report, according to CME Group.
Even an ambiguous report reinforces that the debate remains firmly between a hike or a hold, which is an important change from early March, when officials will were still talking about rate cuts. The rate-setting committee dropped its easing bias in June, with nine of 18 officials projecting a hike as likely to be appropriate this year.
A shrinking labor force cuts both ways against that backdrop. Hawks will see a contracting supply of workers as a reason the job market could remain tight enough to pressure prices even on mediocre hiring. But a jobless rate that falls only because people are leaving the workforce could be too soft a signal to build an argument around hiking.
The deeper reason the report changes little is that the two halves of the Fed's mandate are no longer weighted equally. Inflation has become the binding concern, and the coming months' price data will matter far more to the rate path than the monthly jobs numbers.
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