Weak jobs report leaves Fed facing tougher call on rates

A sharply weaker-than-expected jobs report has cut the odds of a Federal Reserve interest rate hike in September, complicating the central bank's next policy decision. Nonfarm payrolls fell by 23,000 in July, versus expectations of an 85,000 gain, marking the third-largest monthly job loss since the pandemic.

Trailing 12-month wage growth came in at 3.2%, below June's 3.5% inflation rate, meaning pay is not keeping pace with rising prices. The data has shifted market expectations: the CME Group's FedWatch Tool showed the probability of a 25-basis-point September rate hike falling from 67% on July 31 to 44.4% by Aug. 7, while odds on prediction platform Polymarket dropped from roughly 60% to about 40% over the same period.

The shift follows an unusually divided July Federal Open Market Committee meeting, where three members dissented in favor of a rate hike — the first time in a decade that three dissents have pushed in the same policy direction. Inflation, driven in part by tariff-related price pressures, remains above the Fed's comfort level even as the labor market shows signs of strain.

The Fed now faces a tradeoff: holding rates steady could support a weakening jobs market but risks letting inflation run higher, while raising rates to fight inflation could further pressure employment. A decision is expected at the September FOMC meeting.

Read the full story at The Globe and Mail.