The probability of interest rate hikes in September will rise above 60%! US non-farm accidents are strong, but the real “big test” is still in next week's inflation data

The Zhitong Finance App learned that the US non-farm payroll employment growth in August unexpectedly greatly exceeded market expectations, indicating that the labor market, which was previously thought to be clearly cooling down, is still quite resilient, and further reinforces the reasons for the Federal Reserve's interest rate hike in September. However, many analysts believe that strong employment data alone is not enough to ensure that the Federal Reserve takes action; the key to actually determine the direction of interest rates in September will be the US inflation data released next week.

According to data released by the US Bureau of Labor Statistics, the number of non-farm payrolls increased by 162,000 in August, exceeding the expectations of all economists in the media survey, while the unemployment rate remained unchanged at 4.1%. Meanwhile, the July employment decline announced earlier has also been revised in this report, indicating that the actual momentum of the US labor market is stronger than previously judged.

After the data was released, the market quickly raised its bets on the Federal Reserve's interest rate hike in September. According to federal funds futures pricing, investors expect the probability that the Federal Reserve will raise interest rates this month from about 50% to slightly more than 60%.

However, the latest employment report did not show that the labor market is clearly increasing inflationary pressure, so the market focus will soon shift to price data to be released next week.

BMO Capital Markets strategist Vail Hartman said that the latest employment data provided more support to the hawkish camp within the Federal Reserve, but “not enough to constitute a decisive reason for the September 16 interest rate hike.” Hartman pointed out that although the market's implied probability of interest rate hikes in September has risen, employment data will still be less important than inflation in this month's policy decisions.

Olu Sonola, head of the US economy at Fitch Ratings, described the employment report as “unquestionably strong,” believing that the data once again proved that the US labor market remains stable. However, he also stressed that what could really change the Federal Reserve's policy expectations is the consumer price index (CPI) to be announced next week.

The US Bureau of Labor Statistics will release the August Producer Price Index (PPI) next Thursday, followed by the Consumer Price Index on Friday.

As inflation continues to rise above the 2% target, there are already clear differences within the Federal Reserve about the next policy direction. If next week's data once again shows that price pressure is stubborn or even accelerates again, it may push more Federal Open Market Committee (FOMC) members to support interest rate hikes; conversely, if inflation cools down significantly, the Federal Reserve is more likely to keep interest rates unchanged.

Yelena Shulyatyeva, senior US economist at the Conference Board, said that a “large number” of Federal Reserve officials are currently awaiting next week's data to confirm whether inflation continues to fall back to the 2% target. “Everything depends on next week's inflation data,” she said. If the data doesn't prove that inflation is continuing to improve, then the Federal Reserve is likely to choose to raise interest rates.

The Federal Reserve chose to keep interest rates unchanged at the previous five meetings this year, but internal policy differences are widening. At the July meeting, most officials supported remaining on hold, but three officials advocated raising interest rates by 25 basis points. Since then, two more policymakers without voting rights have revealed that they are also inclined to support interest rate hikes.

Federal Reserve Chairman Walsh also further strengthened market discussions on interest rate hikes at the Jackson Hole Global Central Bank Annual Meeting last week. Walsh believes that the US labor market is generally stable, so the current policy focus should be on inflation.

Although Walsh did not clearly support the September rate hike, he stressed that the Federal Reserve must be convinced that inflation is experiencing a “meaningful slowdown,” otherwise policymakers still “have work to do.” This statement was viewed by the market as Walsh's closest speech to release a signal of further tightening monetary policy so far.

However, there are still clearly different voices within the Federal Reserve.

Federal Reserve Governor Kwaller said that he is currently more inclined to keep interest rates unchanged in September, unless the inflation data released next week is clearly too hot. New York Federal Reserve Chairman Williams believes that recent inflation data is “encouraging” and already shows that price pressure is slowing down.

By contrast, Cleveland Federal Reserve Chairman Hammark's position is clearly more hawkish. After the release of the non-agricultural data on Friday, she said again that now “it is time to act.” Hamak was one of the three opponents who supported interest rate hikes at the July meeting. She believes that both the latest economic data and feedback from Cleveland Federal Reserve companies indicate that the current monetary policy may still not be sufficient to restrict the economy.

At the same time, the Federal Reserve's policy discussions are also facing increasing political pressure from the White House.

US President Trump posted on social media on Friday, once again publicly demanding that the Federal Reserve lower interest rates and directly put pressure on the new Federal Reserve under Walsh's leadership. Notably, Trump requested interest rate cuts after August's non-farm payrolls data greatly exceeded expectations, yet the financial market's reaction to the same data was just the opposite, further raising bets on the September rate hike. Trump said that America's current credit situation is stronger than it was recently, so it should enjoy lower interest rates and asked the Federal Reserve to be “smarter.”

Walsh was appointed by Trump this year to replace former Chairman Powell. However, since taking office, Walsh's stance on inflation has clearly been tough, and he has shown no sign of meeting the White House's demand for interest rate cuts.

Mark Spindel, chief investment officer of Potomac River Capital, believes that the current employment data is very strong, but it is still not enough to push the Federal Reserve to take action to raise interest rates alone. He said, “No matter how strong today's data is, I don't think anyone would decide to tighten policies just because of this data. Next week's inflation report will be decisive.”