Key facts
- July saw a contraction of 23,000 payroll jobs, below economists' forecasts.
- Average job gains over the last three months were 21,000.
- Hourly earnings growth slowed to its weakest pace since May 2021.
- The unemployment rate decreased to 4.1% in July.
- Market expectations for a September Fed rate hike fell below 50%.
Federal Reserve officials are primarily focused on inflation trends, which have consistently exceeded the central bank's 2 percent target for five years. The weaker-than-expected July jobs report, which showed a contraction of 23,000 payroll jobs and the slowest hourly earnings growth since May 2021, has diminished the urgency for a September interest-rate hike. However, the possibility of a hike remains, as upcoming inflation reports will be a key consideration for Fed officials.
Economists like Michael Feroli of JPMorgan Chase suggest the weakness in the jobs report may be overstated, with overall economic growth still around 2% and decent labor-productivity growth. Richmond Fed President Tom Barkin described the labor market as being in a "weak balance" for the past 18 months, characterized by low hiring and firing, but still considered "OK." The unemployment rate also saw a slight decrease to 4.1% from 4.2% in June.
Market participants have reacted to the jobs data, with traders in derivative markets lowering their expectations for a September rate hike to below 50%, down from 67% a week prior. Historically, the Federal Reserve has only hiked rates twice out of 89 meetings immediately following a contraction in employment, according to Warren Pies of 3Fourteen Research. Despite the soft jobs print, some analysts, such as those at Payden & Rygel, believe the Fed may still lean towards rate hikes due to persistent inflation concerns, though a weak job growth report could provide a reason for some officials to wait longer.