Fed's Hawkish Tone Despite Cooling Jobs Market
The latest ADP report showed private hiring slowing to its weakest pace since January, adding only 38,000 jobs in August. This was well below the 47,000 consensus estimate and a drop from previous months.
Despite this, the market remains convinced that the Federal Reserve will raise interest rates at their September meeting, with a probability of 66.2% according to CME FedWatch. This has left investors wondering why Fed Chair Kevin Warsh sounded so hawkish at Jackson Hole, guiding for a near-term rate hike even in a cooling jobs market.
Nela Richardson, ADP chief economist, explained that the report showed an uneven labor market with strength concentrated in sectors such as education and health services. However, this was offset by declines in manufacturing and professional and business services.
The median base pay rose 3.2% year over year, but wage growth has been overtaken by demographic change, persistent inflation, and the effects of AI on jobs. Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said that the data show AI is affecting hiring less than other changes in the economy.
Fed Chair Warsh made it clear that a low payroll number can coexist with a stable unemployment rate, and his bigger concern is inflation. He noted that 12-month PCE inflation stood at 3.7%, while the six-month measure was 4.1%. The Bank of America analysis found that Warsh devoted roughly twice as many words to inflation as to the labor market in his Jackson Hole speech.
The S&P 500 traded 0.5% higher on Wednesday, and the yield on the 10-year Treasury bond stayed flat at 4.8%. The next key data point will be the August CPI on September 11, which could influence the Fed's decision five days later.