Fed rate decision still hangs on inflation after jobs report

By Maria Eloisa Capurro

(Bloomberg) — A surprise jump in U.S. hiring last month has bolstered the case for the Federal Reserve to raise interest rates when they meet later this month, but a hike is still not guaranteed.

Nonfarm payrolls in August topped all estimates in a Bloomberg survey, and the unemployment rate held steady at 4.1%. The latest report didn’t suggest the labour market is adding to price pressures, however, and analysts continue to expect the next Fed rate decision will hinge on inflation data due next week.

Meanwhile, President Donald Trump revived his pressure campaign on the US central bank, demanding in a social media post Friday that the Fed lower rates — even as investors boosted bets that they will raise them this month.

“Today’s data lends support to the hawkish camp, but stops shy of making a definitive case for a rate hike on September 16,” Vail Hartman, a strategist at BMO Capital Markets, wrote in a note to clients. “While the market-implied probability of a rate hike this month has increased, the employment data will play a secondary role to inflation.”

The probability investors assigned to a rate increase this month, based on federal funds futures pricing, jumped to just above 60% from about 50%.

Coming price data

The jobs report showed nonfarm payrolls increased 162,000 last month and July’s job losses were revised away, suggesting the labour market has more momentum than previously thought.

Olu Sonola, head of U.S. economics at Fitch Ratings called the jobs report “unequivocally strong,” reaffirming the stability of the labour market. But, he added, “The real event risk is next week’s CPI report. That is the print capable of moving the needle.”

The Bureau of Labor Statistics will release August data for the Producer Price Index on Thursday, followed by the Consumer Price Index on Friday.

With Fed officials concerned by persistently high inflation, but divided over how monetary policy should respond in the near term, new evidence of price pressures could tilt the Federal Open Market Committee into a rate hike. Cooler reports are likely to keep the Fed on hold, as it’s been through five previous meetings this year.

Those divisions came to the forefront at the July meeting. While most officials supported the decision to hold rates steady, three dissented in favour of a quarter-point hike. Two non-voting policymakers have also since revealed they sided with the dissenters.

“It’s all about the inflation data next week,” said Yelena Shulyatyeva, senior U.S. economist at the Conference Board.

She said a “big group” of officials are looking to next week’s data for evidence that inflation is moving sustainably back toward the central bank’s 2% goal. “If it doesn’t happen, then I think they will hike.”

The president’s post on Truth Social, however, adds politics to the mix — a variable Fed officials have long tried to exclude from their deliberations. He also aimed his message directly at the new Fed Chairman Kevin Warsh, without naming him. Trump nominated Warsh to the post earlier this year.

“Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago!” Trump said. “The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change.”

–With assistance from Catarina Saraiva and Andrew Ackerman.

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