The case for a Federal Reserve interest-rate increase at the September policy meeting has regained prominence after the Labor Department reported a much larger-than-expected gain in U.S. payrolls for August. Nonfarm payrolls rose by 162,000 last month, roughly triple the 56,000 addition economists had forecast, according to the Bureau of Labor Statistics employment release.
August's figures also showed a notable uptick in labor force participation. The share of people working or actively seeking work climbed to 61.6%, driven by a 300,000 increase in the number of people moving off the sidelines directly into employment and a decline in the number of workers or job seekers exiting the labor market. Those shifts helped keep the unemployment rate unchanged at 4.1%.
The report recorded a marked improvement in Black unemployment, which fell to 6% in August after spiking as high as 8% last fall. At the same time, average hourly earnings increased by 3.1% year-over-year, a pace the report characterized as remaining in a range consistent with a 2% inflation target.
Fed officials have repeatedly described recent labor market conditions as solid and have noted that wage growth has not appeared to be adding materially to inflation pressures. The new employment data, while strong, does not automatically overturn that judgment, leaving next Friday's consumer price index and the producer price index as the potential tie-breakers for policy direction.
Market and policy reaction has been mixed but attentive. Pantheon Macro economists summarized the immediate implication of the employment release by saying it leaves the September Federal Open Market Committee meeting "finely balanced," and that committee members have signaled they will look to forthcoming inflation data to guide their next steps. The FOMC is scheduled to meet on September 15-16.
Last week, traders had lifted the odds of a September rate increase in the wake of remarks by Fed Chairman Kevin Warsh in Jackson Hole, Wyoming, where he said he could not read much reassurance from recent cooling in inflation and wanted to see further improvement before feeling confident that short-term rates were high enough to contain price pressures. In the days since, several other Fed officials expressed greater comfort with holding the current policy rate steady.
Fed Governor Christopher Waller told Reuters NEXT that he would support keeping the federal funds rate in the 3.50%-3.75% range if next week's inflation data, which includes the CPI and the producer price index, confirms that price pressures continue to moderate. He described Friday's jobs report as likely to be "satisfactory," suggesting it would not materially alter his own assessment of the policy path.
Analysts at Capital Economics wrote that even the most dovish policymakers would find little in the August employment data to justify holding rates unchanged. They noted the path to a September hike still depends heavily on next week's CPI and PPI readings, but said the underlying strength in the labor market means only a data pattern consistent with a moderately above-target rise in the core PCE deflator would be needed to shift their forecast in favor of a September move.
Markets reacted to the employment surprise by nudging higher the probability investors assign to a September rate increase. Short-term interest-rate futures implied about a 62% chance of a hike this month, up from roughly 55% before the jobs report.
That reassessment of likely policy actions has prompted some forecasters to move their rate outlooks. Nationwide's chief economist, Kathy Bostjancic, wrote that the strong employment data adds support for additional rate hikes this year and that her team now sees two 25-basis-point increases by year-end, which would lift the fed funds rate to a 4.00%-4.25% range.
With the labor market showing renewed resilience but wage growth staying moderate, the policy debate at the Fed will center on whether incoming inflation readings continue to demonstrate disinflationary momentum. If next week's consumer and producer price figures remain soft, the argument for leaving rates on hold will strengthen. If they show less moderation than expected, the case for a September hike will be harder for policymakers to dismiss.
For now, the employment report has narrowed the margin of error in Fed deliberations while placing primary emphasis on the scheduled inflation releases as the decisive inputs for the September FOMC decision.