The Federal Reserve is expected to raise interest rates again at its next meeting later this month despite a weaker-than-expected June employment report.
The economy added 209,000 jobs in June, the Bureau of Labor Statistics reported Friday. That was below forecast expectations of 225,000, and it was the first report in months that came in below the consensus prediction. It was also the slowest pace of job growth since December 2020.
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The Fed is walking an interest-rate tightrope with its program of quantitative tightening. If it tightens too little, inflation suppression could be unsuccessful, and higher prices may stick around for longer. If it tightens too much, it could cause job loss and a potential recession.
Fed officials have been hoping to see some softening in the labor market in order to drive down inflation, although that is a tough prospect because of the way a slowing job market affects the lives of consumers. But despite this latest report showing signs of a slowdown, overall, it is historically strong and lends credence to the Fed conducting another round of rate increases that the central bank has been hinting at.
The Fed also hopes to see average hourly earnings cool off more than they have. As of the June report, average hourly earnings were up 4.4% on a year-over-year basis. That is well above the about 3.5% level that the Fed is targeting, which would be in line with the central bank’s 2% inflation target.
As of Friday, investors assigned a more than 92% chance that the Fed will raise rates in July, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. That is actually up slightly from the day before and up from more than 86% a week ago and just over 50% a month ago.
“It all tells the Fed they aren’t done yet if they are hoping their rate hikes would cool economic demand and lessen the upward pressure on wages,” Chris Rupkey, the chief economist at FWDBONDS, said. “The less than expected jobs data won’t scuttle the Fed’s plans for a rate hike on July 26. Bet on it.”
The Fed itself has been messaging that its pause at its last meeting in June, the first since March 2022, is merely temporary and that rates are expected to move higher through this year in order to tamp down inflation.
The Fed’s updated projections that were released following its June meeting showed that Fed officials expect two more rate increases over the next year, more than penciled in during the spring. That update came as a surprise for some Fed watchers at the time.
During a press conference last month, Fed Chairman Jerome Powell noted just how much the Fed has raised rates over the past year and pointed out that the effects of the central bank’s tightening have yet to be entirely felt.
“In light of how far we’ve come in tightening policy … today we decided to leave our policy interest rate unchanged,” Powell said. “Looking ahead, nearly all committee participants view it is likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.”
The Fed’s current interest rate target is 5% to 5.25%, and while a rate hike is all but assured following the next meeting of the Federal Open Market Committee, some are betting the central bank will go even further and hike rates again at its meeting in September.
Investors are now pegging about 23% odds that rates will go as high as 5.5% to 5.75%.
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All eyes are now on the coming consumer price index report for June. After peaking above 9% last June, the CPI rate (which is the most widely cited rate by economists) fell to 4% in May.
“Next week's CPI report will be even more important for financial markets to consider if the pace of inflation is edging lower quickly enough to satisfy the Fed's need to quell inflation with two additional rate hikes or will July's rate hike suffice,” Quincy Krosby, the chief global strategist for LPL Financial, said.