Fed's September Hike Odds Plunge to 40% on Weak Jobs Data

Federal Reserve Chair Kevin Warsh and the Federal Open Market Committee face a September decision with no clean option: markets price just a 40 percent chance of a quarter-point hike after July nonfarm payrolls fell by 23,000, the third-largest monthly loss since the pandemic.

"This is not a rate cut trade, at least not yet. The Fed has been parked at 3.50 to 3.75 all year and September was genuinely live for a hike right up until the payrolls miss," said Patrick Kennedy, founder and managing partner at AllSource Investment Management.

The shift has been abrupt. CME Group's FedWatch Tool, which uses 30-day fed funds futures, showed a 67 percent probability of a 25-basis-point hike on July 31, falling to 44.4 percent by Aug. 7. Prediction platform Polymarket cut its odds from roughly 60 percent to 40 percent over the same stretch. Gold climbed above $4,400 an ounce, while Wednesday's consumer price index came in at 0.1 percent monthly and 3.4 percent annually, with core at 2.5 percent.

The dilemma is that both paths carry risk. Raising rates to fight inflation that has run above the Fed's 2 percent target for 64 straight months could deepen a fragile labor market where trailing 12-month wage growth of 3.2 percent trails June's 3.5 percent inflation. Holding pat risks letting Trumpflation — inflation tied to President Donald Trump's tariffs and the Iran war — become entrenched. The FOMC meets in five weeks.

A Jobs Report That Broke the Consensus

Economists had expected the creation of 85,000 jobs in July. Instead, nonfarm payroll employment fell by 23,000, marking the third-largest monthly decline since the COVID-19 pandemic and one of the weakest reports of the decade. The miss was compounded by wage growth that no longer keeps pace with prices: trailing 12-month wage growth of 3.2 percent against June's 12-month inflation of 3.5 percent.

The July FOMC meeting had already exposed a divided committee. Three officials dissented in favor of a quarter-point hike — the first time three dissents in the same policy direction have occurred in a decade. The stickiness of core Personal Consumption Expenditures forecasts, which strip out volatile food and energy costs, points to inflation broadening beyond the energy sector.

The Fed's Two-Way Risk

For Warsh, price stability appears the more pressing half of the dual mandate. Core inflation has now exceeded the Fed's 2 percent target for 64 consecutive months, a stretch that has drawn criticism that the central bank has lost credibility on inflation. If the inflationary effects of the Iran war become entrenched in the broader economy, delivering price stability only gets harder.

Yet hiking into a softening labor market carries its own costs. The last time the Fed tightened into a weakening jobs picture, rate increases pushed borrowing costs higher and weighed on rate-sensitive sectors within months. With the fed funds rate parked at 3.50 to 3.75 percent all year, the September meeting is the first genuine test of whether Warsh can thread both mandates.

"Gold's recent rebound appears to be driven more by changing expectations around interest rates and the economy than by fear alone," said Joe Cavatoni, senior market strategist at the World Gold Council. The dollar's response has been muted — the U.S. dollar index traded higher Wednesday even as hike odds fell, while EUR/USD respected resistance near its recent range. That split shows how much of the September decision now hinges on the next inflation print rather than the labor data alone.

The decision in five weeks could send the Dow, S&P 500, and Nasdaq Composite — all at record highs — to new heights or knock them off their pedestal. If the Fed stands pat, it bets that Trump-driven inflation cools on its own; if it hikes, it accepts a hit to an already fragile job market. Markets will parse Warsh's Jackson Hole remarks later this month for the first signal of which way he leans.

This article is for informational purposes only and does not constitute investment advice.