The Labor Department said last month the economy added 528,000 jobs, a larger than expected number than expected. The June data was revised higher to show 398,000 jobs created instead of the previously reported 372,000, while the unemployment rate fell to a pre-pandemic low of 3.5%.
The strength of the labor market is a double-edged sword for Fed officials. They see it as an encouraging sign that they can raise rates to tame inflation without a spike in the unemployment rate, but also a concerning one given that the labor market will need to cool to help ease price pressures.
Friday's blowout number of job gains will probably cause policymakers to think about whether or not they are raising rates quickly enough to bring down inflation. Friday's report showed average hourly earnings rising more than expected, to 5.2% from a year ago, which is a result of an extremely tight jobs market.
The bet that the central bank would raise its policy rate by 75 basis points in September to an almost 70% probability, up from around 40% before the employment report was raised by investors in futures contracts tied to the Fed's benchmark overnight interest rate.
Michael Feroli, chief U.S. economist at J.P. Morgan, said today's numbers should mollify recession fears but also highlight concerns that the Fed has a lot more to do, and that's why he revised his call up to a three quarter point hike in September. The Fed's inflation worries will only increase as a result of this jobs report. The central bank may consider another unusually large rate hike at the Sept. 20 - 21 meeting, with officials guided by a ream of critical data points covering inflation, employment, consumer spending and economic growth between now and then, as seen by Fed Chair Jerome Powell last week.
There is only one more monthly jobs report before that meeting, while inflation for months has confounded expectations that it would ease and remains more than three times the target, according to the Fed's preferred measure.
The central bank is plotting its path next Wednesday when it comes to the Consumer Price Index inflation reading.
If the Fed will go ahead with a third straight 75 basis-point rate hike at its policy meeting next month - a pace unmatched in more than a generation - or dial back a bit is of central interest to investors, businesses and consumers who are increasingly worried that the central bank's inflation fight may cause a recession.
A procession of policymakers this week has shown stiffened resolve to continue the aggressive monetary tightening, with nearly all of them saying that the central bank will push ahead with rate hikes until it sees strong and long-lasting evidence that inflation is on track back to the Fed's 2% goal.
Friday's job gains were likely to have furthered that determination. If someone was inclined to jump on board the pivot train, they're likely to jump off at the next station. Art Hogan, chief market strategist at B. Riley said that this isn't indicative of a Fed that will need to shift gears next year and start cutting rates.