The chances of a hike remain, with upcoming inflation reports a key focus for Fed officials
Federal Reserve Chair Kevin Warsh speaks during a news conference late last month.
The weaker-than-expected July jobs report lowers - but does not eliminate - the chances of an interest-rate hike at the Federal Reserve's next meeting in September.
Economists said the disappointing report took away some of the ammunition from Fed critics, who were worried the central bank had waited too long to hike and thought inflation was gathering speed and getting a push coming from a strengthening labor market.
But in the wake of the soft jobs report, things now look different.
"There is still a case for hikes ... but urgency has definitely gone," said Dario Perkins, a central-bank expert at TS Lombard, in a post on X.
Payroll employment contracted by 23,000 in July, well below Wall Street economists' forecasts for a gain of 83,000. In addition to the headline figure, there was softness everywhere in the report. For instance, jobs have only risen at an average of 21,000 in the past three months and hourly earnings are rising at the weakest pace since May 2021.
Still, many economists think the weakness is overstated.
"We don't see many signs that would get us worried about a downshift in momentum," said Michael Feroli, chief U.S. economist at JPMorgan Chase.
"Overall, it still looks like a 2%-growth economy, with decent labor-productivity growth and lackluster labor-input growth," Feroli said in a note to clients. The report only slightly lowered the chances of a rate hike, he added.
Feroli's comments were echoed by Richmond Fed President Tom Barkin, who suggested the jobs report had not caused him to rethink his outlook for a stable U.S. economy.
The July jobs report fits with the same pattern of a labor market that has been in "a weak balance" for the past 18 months, Barkin said during a video webcast with the National Association for Business Economics.
All-in-all, the labor market remains "OK," with the same low-hire, low-fire equilibrium in place, he noted.
"That doesn't feel very good, but that is, I think, where we are," Barkin said.
In addition, for months, many Fed officials have made it a point to say that they are paying more attention to the unemployment rate, which remains low and slipped to 4.1%, from 4.2% in June.
Economists who don't think the Fed needs to hike this year felt vindicated.
"All the excitement into the July Fed meeting was badly misplaced," said Robin Brooks, senior fellow in economic studies at the Brookings Institution. He said the oil price shock from the war with Iran has not broadened out to cause more generalized inflation.
After the jobs report was released, traders in derivative markets lowered their expectations of a rate hike in September to below 50%, from 67% a week ago.
Warren Pies, founder of 3Fourteen Research, said on X that the Fed has only hiked twice after a negative jobs report, out of 89 meetings immediately following a contraction in employment.
Economists at Payden & Rygel still think the Fed will lean toward rate hikes, not because of worries about an overheating labor market but because the Fed has missed its inflation target for five years running.
"A negative [nonfarm-payrolls] print might delay the timing of rate hikes. Today's report likely won't stop the hawkish members who are already seeking rate hikes at the July meeting, but for those in the middle who agreed on staying on hold but were becoming increasingly impatient with above-target inflation, weak job growth could provide a reason to wait just a little longer, lowering the likelihood of a September hike," the Payden & Rygel team said in an email.
James Egelhof, U.S. chief economist at BNP Paribas, said the jobs report fit with his previous forecast that Fed would wait until December to raise rates.
-Greg Robb
Comments