September Rate Rise in Play as Labor Market Meets Fed’s Test

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September remains in play for a Federal Reserve interest-rate increase after the U.S. added 215,000 jobs in July, extending progress that’s encouraged policy makers to move toward removing unprecedented monetary stimulus.

A measure of traders’ bets on a September rate hike rose to the highest level this year after a government report showed employment growth last month was in line with the 211,000 average monthly gain so far this year. The jobless rate held at 5.3 percent, average weekly hours inched up and the underemployment rate edged down. Another jobs report comes out Sept. 4, ahead of the Fed’s next meeting Sept. 16-17.

Fed officials are trying to decide whether the economy has enough momentum before increasing the benchmark borrowing cost for the first time since 2006. The statement from their July meeting showed that they believe an increase will be warranted once there has been “some further improvement in the labor market,” and the data probably meet that standard.

“The contours of this report are exactly what they’d want to see ahead of liftoff,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. He added that while one report won’t make the Fed’s decision, this sustains the trend policy makers are looking for. “This outcome is totally consistent with the notion that labor slack continues to diminish.”

Liftoff Bets

Traders are pricing in a 58 percent probability that the Fed raises rates at the September meeting as of 11:16 a.m. New York time, based on the assumption that the effective federal funds rate will average 0.375 percent after liftoff. That compares with a 50 percent September probability priced in on Thursday.

The Fed is also looking for signs that inflation will strengthen toward its 2 percent target before it starts to increase rates. Policy makers’ preferred gauge has been below target for more than three years, climbing by 0.3 percent in the year through June.

Fed Chair Janet Yellen has said an increase will probably be appropriate this year if the data evolve as expected. The remaining meetings of the Federal Open Market Committee take place in September, October and December, though the October gathering isn’t followed by a Yellen press conference. She has said a policy move is possible at any FOMC meeting.

Governor Jerome Powell, speaking on CNBC earlier this week, said he’ll be especially attuned to employment data before the next meeting as he works to decide when a rate increase is warranted.

Lockhart’s View

Dennis Lockhart, president of the Atlanta Fed and a voting member of the FOMC this year, told the Wall Street Journal in a story published Tuesday that it would take a significant deterioration in the data to convince him not to begin in September.

St. Louis Fed President James Bullard told the Journal last week that “we are in good shape” for a rate increase next month. Bullard votes on policy in 2016.

Friday’s report “meets the criteria for ‘some further improvement’ in labor market conditions and thus will keep the Fed in play in September,” Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut, wrote in a note following the report. “The numbers are not strong enough to end the debate, but we remain comfortable with our view that they will take action at that time.”

Given that Friday’s employment report met expectations, it would take a major slowdown in hiring in August to derail the Fed, said Guy Lebas, managing director at Janney Montgomery Scott LLC in Philadelphia.

“We’re still on target for slow economic growth, decent job growth, stabilizing inflation, and a slowly normalizing Fed,” he said, adding that an August gain of less than 150,000 could take next month off the table for liftoff, if paired with a deterioration in wages.

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