Is the Latest Jobs Report Signaling a More Aggressive Fed Hike?

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The U.S. added 528,000 jobs in July, largely beating estimates, and unemployment was at 3.5%, the Bureau of Labor Statistics (BLS) reported last week. The blowout report is reigniting several economists’ views that the Federal Reserve might move more aggressively at its next meeting in September.

Rusty Vanneman, Chief Investment Strategist at Orion Advisor Solutions, told GOBankingRates that the job report was impressive, especially considering the recent rise in jobless claims, announced layoffs at giants such as Amazon and Walmart, and the recent drop in job openings. He summed it up by saying that it “felt like the expected number of 250,000 was going to be too high.”

“The unemployment rate also dropped to 3.5%, its lowest levels since Feb 2020 and is now knocking on the door of its lowest levels since the 1950s,” Vanneman said. “Thing is, while this number drives at least one spike into the heart of near-term recession fears, in turn it will throw fuel back on the fire of concerns regarding higher inflation and interest rates. For example, wage growth continues to move sharply higher, as average earnings jumped 0.5% last month and is now up 5.2% over the last year. What may be good for the economy near-term, may not be so good for asset prices.”

The jobs report came in way higher than the Dow Jones estimate that 258,000 jobs would be added and unemployment would be at 3.6%, according to CNBC. In doing so, all eyes have now turned to the Fed in anticipation of its next move.

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Fed Governor Michelle Bowman said in a statement on August 6 that she supported the Fed’s decision to raise the federal funds rate another 75 basis points and also supported the “ongoing increases” at coming meetings. She said, “My view is that similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way.”

Gad Levanon, Chief Economist at The Burning Glass Institute echoed the sentiment, telling GOBankingRates that the jobs report shows that the labor market is difficult to cool down. “There are no signs of slowing wage growth, which will continue to feed inflation. The Fed will have to remain aggressive in raising rates to lower inflation,” he said.

Economists and analysts are also anxiously anticipating the Consumer Price Index (CPI) data, set to be released August 10, which will follow the all-items index increasing 9.1% for the 12 months ending in June, a new four-decade high, according to BLS data.

According to Bloomberg, the CPI is expected to increase  8.7% from a year before, thanks largely to decreasing gas prices. However, after removing food and energy costs, annual inflation is expected to tick up to 6.1% from 5.9%, Bloomberg adds.

However, Craig Erlam, UK & EMEA, OANDA senior market analyst, reminded GOBankingRates that “there’s another next month and two inflation reports before the next Fed meeting so a lot can change in that time.”

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He added, “What today has done is put 75 firmly on the table, perhaps even made it the base case at the moment. Basically, the jobs report today achieved what policymakers tried and failed to do all week.”

According to CNBC, JPMorgan economists also said they now expect a 75 basis point hike in September and two more quarter point hikes in November and December. They said the job numbers “should mollify recession fears but amplify concerns that the Fed has a lot more work to do.”

“Unless the data stumble, a case could be made for going more than 75bp at the next meeting,” JPMorgan noted. “It would seem they have an aversion to ripping off the bandage. So far they also seem averse to hiking inter-meeting.”

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