Waller's hold signal halves Fed hike odds to 50-50

Fed Governor Christopher Waller's conditional support for holding rates steady halved September hike odds to a coin flip, leaving Friday's August payrolls report to tip the scale for the Sept. 16 decision.

"The market is still undecided about what the Fed is going to decide at its meeting in two weeks' time," said Christoph Rieger, head of rates and credit research at Commerzbank. "Today's U.S. payrolls could tip the scale for the September Fed meeting."

The 10-year Treasury yield edged down 1 basis point to 4.752 percent, while the 10-year German Bund held at 3.351 percent and the U.K. gilt rose 0.6 basis point to 5.158 percent, according to Tradeweb. LSEG data shows markets now price roughly equal odds of a hike versus unchanged rates, a sharp reversal from Wednesday when about 70 percent probability of an increase was priced in.

The repricing followed Waller's remarks Thursday at a Reuters-hosted virtual event that he would support holding rates steady if August inflation data backed it up — a day after New York Fed President John Williams said data so far doesn't warrant higher borrowing costs. Analysts in The Wall Street Journal's poll expect Friday's data to show 53,000 jobs were created in August, an improvement from the 23,000 decline in July.

Waller is "probably the most important person to listen to after Chairman Kevin Warsh," and his comments underpin the likelihood of unchanged rates at the September meeting, said Mohit Kumar, global economist at Jefferies. "Waller's comments support our view that the Fed will not hike rates at least till the midterms."

The fed funds rate sits at 3.50-3.75 percent after the July meeting, where the committee voted 9-3 to hold with all three dissenters favoring a hike. Chair Warsh made clear at the Jackson Hole symposium that the economy is at full employment and inflationary pressures remain elevated, framing the jobs data under a "good news is bad news" dynamic — strong employment would give the Fed cover to raise rates, pushing bond yields higher and weighing on equities.

Jobs Data Enters a "Good News Is Bad News" Framework

JPMorgan's market intelligence team has set a "Goldilocks zone" of 30,000 to 70,000 new jobs, within which markets are likely to remain relatively stable. If the data exceeds 100,000, U.S. stocks face notable pressure, the 10-year yield moves higher, and markets more fully price a September hike. A reading below 30,000 or negative would freeze hike expectations but could trigger stagflation concerns.

Leading indicators for August are mixed. ADP reported private-sector employment rose by just 38,000, the slowest pace since January, while Challenger data showed employers announced 52,900 layoffs, up from 33,400 in July. Initial jobless claims climbed to 207,000 during the BLS survey window. Goldman Sachs expects only 40,000 new jobs, below consensus.

A policy quirk could mechanically depress the data: roughly 300,000 immigrants, primarily of Haitian descent, had their Temporary Protected Status expire at the end of July. Barclays estimates about 25,000 will disappear from August payroll statistics as employers remove them from rolls. Bloomberg Chief Economist Anna Wong said there is a "reasonably high probability" August payrolls show a second consecutive month of negative growth, and noted there is "no precedent in modern Fed history" for raising rates after two consecutive months of negative job growth.

The BLS annual benchmark revision published in August showed employment was 79,000 lower than previously estimated through March 2026, a 0.1 percent downward adjustment — far smaller than last year's 911,000 revision. Private-sector employment was revised down more sharply by 178,000, with retail trade absorbing the largest cut at 154,600.

Bond Investors Face Structural Headwinds Beyond the Fed

Investors remain cautious about the bond outlook after concerns about elevated energy prices from the Middle East conflict, combined with worries about high debt levels and fiscal policies. In a move that highlights those concerns, the manager of Norway's $2.4 trillion sovereign-wealth fund proposed slashing the weighting of government debt in its bond portfolio to 50 percent from 70 percent.

The MOVE index, which measures Treasury volatility, has climbed to roughly 78 from about 70 last week, while the VIX sits near 15-16 — its lowest levels of the year. The divergence suggests bond investors are pricing more risk than equity markets acknowledge.

First Citizens Bank's Phil Neuhart, head of market and economic research, said the employment data will show whether the labor market remains in its "low hire, low fire" equilibrium, with slow hiring offset by limited layoffs and a declining labor force. "A meaningful decline in payrolls or a shrinking labor force would be early signs that labor market stagnation is giving way to broader weakness."

JPMorgan believes next week's CPI data will carry greater weight for the September meeting than today's payrolls report. With only one payrolls report and one CPI print remaining before Sept. 16, a strong jobs reading would reinforce the self-reinforcing logic of "more jobs → more consumption → further corporate hiring," pushing yields higher and pressuring equities through the transmission mechanism Warsh flagged at Jackson Hole.

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