Traders have slashed the odds of a Federal Reserve rate hike in September after a dismal jobs report, as forecasts point to inflation broadening beyond energy prices. The Fed now faces a five-week window to choose between cooling stubborn inflation and protecting a weakening labor market.
Bets on a September interest rate increase from the Federal Reserve have collapsed within days. The reversal follows one of the weakest jobs reports of the decade and leaves Fed Chair Kevin Warsh and the FOMC facing a far harder call than seemed likely as recently as the end of July.
Rate-hike odds tumble on the jobs shock
As of July 31, the CME Group's FedWatch Tool put the probability of a 25-basis-point September hike at 67%, based on 30-day Fed funds futures prices. By August 7, that figure had dropped to 44.4%.
Prediction market Polymarket showed the same swing. Over the same stretch, the odds of a September hike fell from roughly 60% to 40% on that platform.
A weak jobs report complicates the picture
The catalyst was July's jobs data. Economists had estimated the creation of 85,000 jobs, but nonfarm payroll employment fell by 23,000 jobs instead — the third-largest monthly decline since the COVID-19 pandemic.
Wage growth added to the concern. Trailing 12-month wage growth came in at 3.2%, below June's trailing inflation reading of 3.5%, meaning pay is not keeping pace with rising prices. Raising rates now would mean tightening policy on top of an already fragile jobs market.
Inflation keeps broadening
Even so, price stability appears to be the more pressing half of the Fed's dual mandate right now. Core Personal Consumption Expenditures forecasts, which strip out volatile food and energy costs, point to Trumpflation expanding well beyond the energy sector. The July FOMC meeting itself showed the strain, with three members dissenting in favor of a quarter-point hike — the first time in a decade that three dissents have pointed the same direction.
That leaves the Fed at a crossroads five weeks out. Standing pat on inflation risks letting price pressure entrench further, while hiking risks pushing an already-cooling labor market into deeper trouble.
Source: The Motley Fool
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