By Michael S. Derby
Aug 7 (Reuters) – U.S. hiring data for July drove financial markets to lower forecasts for the U.S. central bank raising its interest rate target at September’s Federal Open Market Committee meeting, after a week in which several Fed officials made the case for lifting rates to tackle stubborn inflation.
Futures markets put at less than even odds of a rate hike at the next FOMC meeting and are split on where the Fed will end up by the end of the year after data showed the U.S. economy lost 23,000 jobs in July amid a modest decline in the unemployment rate to 4.1% from June’s 4.2%, although that shift was driven by the less positive move of workers out of the labor force.
The downward shift in hiring conditions pointed to the possibility that the relative stability of the job market may be more vulnerable than thought.
The rate futures market has now priced in just a 43.9% chance of Fed tightening in September, compared with 57% before the jobs report, LSEG data shows. The probability that the Fed will hold rates next month rose to 60.4% versus 43.2% just before the data release.
Last week, the FOMC voted to keep the federal funds target rate range, its primary tool to achieve its job and inflation mandates, steady at between 3.5% and 3.75%, with three officials dissenting in favor of a rate hike.
It did so as inflation continued to overshoot its target of 2%. The Fed’s main inflation gauge, the personal consumption expenditures price index, was up 3.7% year-on-year in June.
HAWKISH TURN
In the days since the Fed met, a number of officials have expressed strong interest in a hike, or an openness to tighter policy depending on what lies ahead for the economy.
Confidence the Fed can raise rates has in part been driven by officials’ view the job market is stable, which gives the central bank space to concentrate on inflation.
The relative weakness of hiring last month complicates that analysis, even as Federal Reserve Bank of Richmond President Thomas Barkin said after the report that it “was very consistent with how I’ve been seeing the labor market, which is, it’s not loose, it’s not tight”.
While futures markets may have downgraded expectations the Fed will tighten monetary policy, some cautioned that may not be the case given how central bankers are thinking.
“While the July report and the downward revisions to prior months put a dent in the idea that the labor market is stable, recall that Fed officials have in recent months indicated that they think the breakeven pace of job gains is fairly low,” said Omair Sharif, president of forecasting firm Inflation Insights.
“I am not sure today’s downside surprise will materially move the needle for a Committee that is looking much more closely at inflation data and seems poised to hike rates if the July and August inflation prints are firm,” he added.
Citibank analysts, meanwhile, said “softer labor market data and upcoming cooler inflation means Fed officials will once more need to balance upside risk to inflation with downside risk to employment”.
“Hikes are unlikely and we continue to think the next move is a cut—with a base case for this to be delivered in October,” the Citibank economists said in a note.
(Reporting by Michael S. Derby and Gertrude Chavez-Dreyfuss; Editing by Toby Chopra)
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