The July jobs report raises the risk of a full-percentage point interest rate increase when the Federal ReserveFederal Reserve meets in September as policymakers try to crush inflation and cool the labor market, according to Citigroup economists.
Citigroup strategists, led by Andrew Hollenhorst, wrote in a Monday analyst note that the surprisingly strong jobs report, coupled with faster-than expected wage growth, could make a 75 basis-point hike in September very likely and raise the potential for further super-sized increases. A 100 basis-point increase would put the benchmark range between 3.25% and 3.50%, since the Fed started announcing moves in the overnight federal funds rate in 1994.
Our base case remains for a 75 basis-point hike in September, but we wouldn't be too surprised by a 100 basis-point hike if core inflation comes in stronger than expected, he wrote.
The Labor Department said Friday that 528,000 jobs were added in July, a gain that was unaffected by fears of a slowdown in labor markets because of scorching inflation and rising interest rates. In the one month period from June, growth of the workforce increased by 0.5%.
With higher-than-expected wage growth, the way to a third consecutive interest rate hike of 75 basis points is triple the usual size when Fed policymakers meet in September.
According to CME Group's FedWatch tool, traders are already pricing in a 70% chance of another super-sized increase in the fall.
In July, policymakers approved a second straight 75 basis-point hike and hinted in their post-meeting statement that additional increases are likely to occur in the coming months as they remain committed to returning inflation to its 2% objective. Chairman said during his post-meeting press conference that another 75 basis-point hike could be appropriate in the future, but it ultimately depends on the upcoming economic data. We're going to watch the data and the evolving outlook very carefully and make a decision in September about what to do, Powell said. I'm not really going to give any specific guidance about what that might be. We might do another unusually large rate increase, but that's not a decision we've made at all.