Fed Comfort in Upbeat Jobs Data Doesn’t Guarantee September Hike

  • Chances of move at September FOMC meeting jump on payroll news
  • July jobs report will fuel call from hawks for Fed to tighten

Will July Jobs Surge Boost Fed Rate Hike Chances?

The argument for the Federal Reserve to raise interest rates in September just got stronger with another bumper U.S. employment report. But that’s probably not going to be enough to persuade the central bank to drop its strategy of wait-and-see.

“The July jobs report certainly increases the odds of a September tightening, but I’d still keep them somewhat below 50 percent,” said Dean Maki, chief economist at Point72 Asset Management LP in Stamford, Connecticut and a former Fed staffer. “There are many ways for a potential Fed tightening to be derailed, as we found out several times this year.”

U.S. payrolls leaped for a second straight month in July as employers added 255,000 positions, and June’s impressive figure was revised up to 292,000, the Labor Department reported Friday. The unemployment rate remained level at 4.9 percent as more Americans came off the sidelines to join the workforce.

The headline jobs number will further reassure Fed Chair Janet Yellen and her colleagues that the labor market is continuing to eliminate slack.

Friday’s data showed the average work week increased and average hourly earnings rose by a more-than-forecast 0.3 percent from a month earlier. All that will bolster the argument that the Fed should act soon to prevent prices from rising too quickly. Inflation has been under the Fed’s 2 percent target since 2012.

Hawks Strengthened

“If the August payroll figure looks anything like this one, those participants looking for two rate hikes this year will have considerable ammunition to make their case,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.

QuickTake What's in a Monthly Jobs Report?

The chances of a move at the Sept. 20-21 meeting of the Federal Open Market Committee jumped to 26 percent after the news from 18 percent on Thursday, according to pricing in federal funds futures, with the probability of a hike in December at 48 percent.

The median estimate of officials in June was for two quarter-point increases this year, though six policy makers projected only one increase. Despite Friday’s strong jobs numbers, those Fed doves have their own case to argue.

In addition to the surprisingly weak figure on gross domestic product released last week -- just 1.2 percent annualized growth in the second quarter -- Friday’s report showed the labor market hasn’t lost all its slack.

Labor Slack

The underemployment rate climbed to 9.7 percent in July from 9.6 percent as many of the people entering the workforce had to settle for part-time jobs. The number of people working part-time for economic reasons rose to 5.94 million from 5.84 million. Also, the number of discouraged Americans, those who stopped looking for work because of bleak prospects, rose to a five-month high of 591,000.

“The data is still too ambiguous to make September a timely move,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto. “We still have the trend in the manufacturing sector looking weak. And we had soft first-half growth numbers that need replacing by better numbers before we start raising rates.”

Since lifting rates in December for the first time in nearly a decade, the Fed has held the target range steady at 0.25 percent to 0.5 percent as officials monitored a series of shocks to global financial markets and volatile domestic economic data.

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