US Jobs Report Weighs Down Expectations of Fed Rate Hike
A weak US jobs report released on August 7 has reduced expectations of a Federal Reserve rate hike in September. The data showed that the U.S. economy lost 23,000 jobs in July, while unemployment fell to 4.1% from 4.2%. Despite several central bank officials advocating for tighter monetary policy to combat inflation, the market is now divided over the ultimate direction of monetary policy by the end of the year.
New York Fed President John Williams believes that inflation will decline in the second half of this year and fall further next year, but noted that if the economy does not follow a path that brings inflation back to 2%, it would be entirely appropriate to act. Philadelphia Fed President Anna Paulson expressed an 'open mind' about what the Fed should do, suggesting that the response could be 'higher rates for longer' or 'the same rates for an extended period'. Richmond Fed President Thomas Barkin said the July report had not changed his understanding of the labor market.
Despite the shift in expectations, many economists still see a possible path toward higher rates. Citi analysts emphasize that weak employment data and an expected slowdown in inflation will once again force the Fed to balance the risk to inflation against the risk to employment. According to Citi, a rate hike appears unlikely, while the base case calls for rate cuts as early as October.