August hiring topped all forecasts in a Bloomberg survey, with nonfarm payrolls up 162,000 and the jobless rate steady at 4.1%. July's job losses were revised away, pointing to more momentum than previously assumed. Even so, the figures did not indicate that the labor market is feeding new price pressure. Using federal funds futures as a guide, investors now assign a bit more than a 60% chance of a hike this month, up from roughly 50%.
"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 of BMO Capital Markets wrote 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 divide from July still looms. Most officials backed holding rates steady at that meeting, three officials argued for a quarter-point increase and dissented, and two non-voting policymakers later said they sided with the dissenters.
The Fed has kept rates unchanged through five meetings this year. Warsh, appointed earlier this year, has talked tough on inflation without signaling a specific move.
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"It's all about the inflation data next week," said Yelena Shulyatyeva, the Conference Board's U.S.-focused senior economist. According to her, a "big group" of officials are looking for evidence inflation is on a durable path back toward the 2% goal.
The market is leaning toward a September hike, but next week's PPI and CPI likely call the play. Stronger price readings could tilt the committee toward action, while cooler prints would probably keep them on hold as they have been for five straight meetings.
