A dismal July jobs report has upended Wall Street’s expectations for next month’s Federal Reserve meeting, complicating new Fed Chair Kevin Warsh’s stated mission of driving inflation back down to the central bank’s 2% target.
The Labor Department reported that employers cut 23,000 jobs in July — a surprise contraction economists had not been forecasting — and revised down hiring for May and June by a combined 103,000 positions. The revisions erased much of what had looked like a resilient labor market just weeks earlier. In the wake of the report, the market-implied probability that the Fed holds interest rates steady at its September meeting jumped to 56%, up from 45% the day before, according to federal funds futures pricing.
“The chances of holding just went up pretty significantly today,” said Cory Stahle, an economist at the Indeed Hiring Lab, adding that further signs of labor-market deterioration could put rate cuts back on the table in the months ahead.
Heather Long, chief economist at Navy Federal Credit Union, struck a more cautious tone about what the data means for the broader economy. “The U.S. labor market is stalling again, and that is going to make the Federal Reserve’s job harder,” Long said.
The weak jobs numbers land at a delicate moment for the Fed. Warsh, confirmed by the Senate in May and sworn in as chair later that month after a contentious nomination fight, has made clear that bringing inflation back to target is his top priority — even as the labor market shows fresh cracks. Annual inflation ran at 3.5% in June, well above the Fed’s goal, and forecasters expect the July Consumer Price Index, due out in the coming weeks, to come in only slightly cooler at around 3.4%.
That combination — sticky inflation alongside a softening job market — is exactly the bind the Fed has spent much of the year trying to avoid. Some economists argue the inflation numbers still leave room for the Fed to keep policy tight, or even raise rates further. Bank of America economists are sticking with a call for a 0.75 percentage point rate hike before the end of the year, arguing that Warsh’s Fed is unlikely to ease up on inflation just because hiring has cooled.
Others see it differently. If August’s jobs and inflation data confirm the July slowdown wasn’t a one-off, analysts say the Fed could pivot toward cuts to avoid tipping the economy into a deeper slump. For now, though, the September meeting looks far less like a lock for a hike than it did a week ago, with traders and economists alike bracing for a “wait and see” approach from Warsh’s Fed.
For consumers, the uncertainty cuts both ways. A prolonged hold or a hike would keep borrowing costs — mortgages, auto loans, credit cards — elevated for longer. A weaker labor market, on the other hand, raises the risk of slower wage growth and softer hiring heading into the fall, even as prices at the register remain stubbornly above the Fed’s comfort zone.
The Fed’s next policy meeting is scheduled for September, and officials will have a fresh round of jobs and inflation data in hand before making their call.
