Five Inflation Reports to Test Fed's September Rate Hold

Five inflation reports land before the Fed's Sept. 15-16 meeting, with the Aug. 12 CPI print the first test of whether July's weak jobs data can keep the central bank on hold.

The Federal Reserve's September rate decision now hinges on five inflation reports due before the Sept. 15-16 FOMC meeting, after July's jobs report showed employers cut 23,000 positions and shifted market odds toward a hold. The Bureau of Labor Statistics data, released Thursday, came in well below the 80,000 gain economists polled by LSEG had expected, while the unemployment rate dipped to 4.1 percent from 4.2 percent.

"The weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. "If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed."

The Aug. 12 CPI report kicks off the data stretch, followed by PPI on Aug. 13, PCE on Aug. 26, and two more reports — PPI on Sept. 10 and CPI on Sept. 11 — just days before policymakers vote. Oil prices surged roughly 21 percent in July after Iran-related conflict disrupted energy markets, threatening to lift consumer inflation broadly. CME FedWatch data shows traders now price a 55.9 percent probability the Fed holds rates at 3.5 percent to 3.75 percent, up from 45 percent a day earlier, with the odds of a 25-basis-point hike falling to 44.1 percent.

A hotter-than-expected CPI print could push Fed Chair Kevin Warsh to support a September hike, according to a Financial Times report citing people familiar with his thinking. Long-term inflation swaps still imply 2.4 percent average inflation, and 30-year Treasury yields hover near 20-year highs, showing persistent market concern that the Fed's inflation fight is not finished.

Jobs Data Complicates the Fed's Calculus

The July employment report showed a labor market cooling at an orderly pace, but not collapsing. Private payrolls added 30,000 jobs, well below the 78,000 estimate, while government payrolls contracted by 53,000. Manufacturing added 5,000 jobs, retail lost 19,400, and financial activities shed 14,000. Healthcare added 22,000 jobs, a slowdown from the average monthly gain of 36,000 over the past 12 months.

Average hourly earnings grew 3.2 percent over the past year, below the 3.5 percent estimate, while June's figure was revised down from 3.5 percent to 3.4 percent. The labor force participation rate held at 61.4 percent, down 0.7 percentage points since January. Revisions also cut May and June payrolls by a combined 103,000 jobs.

"The labor market is experiencing an orderly slowdown, and labor stress indicators remain historically low," said Jeffrey Roach, chief economist at LPL Financial. "However, the decline in the unemployment rate will complicate the Fed's decision process because the economy appears to be at full employment."

What a Hot CPI Would Mean

If July's CPI comes in above expectations, it would mark the third consecutive month of elevated inflation readings and strengthen the case for a September hike. The last time oil prices surged at this pace — a 21 percent monthly jump — was during the 2022 energy shock, when headline CPI peaked at 9.1 percent in June of that year before the Fed embarked on its fastest tightening cycle in four decades.

Traders see the Fed ending the year with one 25-basis-point rate hike as the likeliest outcome, with a 44.9 percent probability, compared with a 26.8 percent chance of two hikes and a 23.6 percent chance rates remain at current levels. Markets opened slightly higher after the jobs report, with the S&P 500 up about 0.4 percent, the Dow Jones Industrial Average up 0.13 percent, and the Nasdaq Composite up 0.96 percent.

"For the third time in as many years, July jobs data saw a mid-summer loss of momentum," said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs. "While incoming inflation data will be the ultimate arbiter, slowing jobs growth helps support a September hold."

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