Fed officials have in recent months characterized the labor market as solid but with wage growth not seen adding to inflation pressures.
While strong, this latest jobs report may not change that overall conclusion, putting the onus on next Friday's consumer price data to potentially seal the case for a rate hike or, if it comes in weak, boost the argument to remain on hold.
"The upshot of today’s numbers is that the September FOMC meeting remains finely balanced," Pantheon Macro economists wrote, referring to the rate-setting Federal Open Market Committee at the central bank, which next meets Sept. 15-16. "FOMC members have uniformly signaled that inflation data will determine their next policy steps."
Traders had ratcheted up bets on a September rate hike last week after Fed Chairman Kevin Warsh told fellow central bankers in Jackson Hole, Wyoming that he did not take much signal from recent cooling in inflation and would need to see further improvement to feel confident that short-term rates are high enough to stabilize prices.
This week, several of Warsh's colleagues sounded more comfortable with staying on hold.
Fed Governor Christopher Waller on Thursday told Reuters NEXT that he would support keeping rates steady in the 3.50%-3.75% range if next week's batch of inflation data, which also includes the producer price index, shows price pressures are continuing to moderate. Friday's jobs report would likely be "satisfactory," he said, signaling it would have little impact on his own view of the proper rate path.
"Even the most committed dove would struggle to find anything in the August employment report to justify keeping interest rates unchanged," Capital Economics analysts wrote. "The prospect for a rate hike this month still depends much more on the August CPI and PPI data next week, but the strength in the labor market means we’ll only need to see data that are consistent with a moderately above-target-consistent gain in the core PCE deflator to shift our forecast back to a September hike."
After the jobs report traders on Friday nudged up bets on Fed rate hikes, with short-term interest-rate futures prices now implying about a 62% chance seen of an increase this month, up from about 55% before the report.
“While Fed officials have communicated that they are squarely focused on the inflation readings, today’s strong employment report also provides additional support for rate hikes this year,” wrote Nationwide Chief Economist Kathy Bostjancic. “We now see two, 25 basis-point rate hikes by year-end, lifting the fed funds rate to 4–4.25%.”
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