July Non-Farm Payrolls Fail to Provide Clear Answer to Fed! "Fed Whisperer": September Rate Hike Decision Still Depends on Inflation

The U.S. July non-farm payroll report unexpectedly recorded a net decrease in employment, while the unemployment rate fell to its lowest level in over a year. This seemingly contradictory jobs report has made the policy outlook ahead of the Federal Reserve's September meeting even more uncertain.

Nick Timiraos, the economic reporter known as the "Fed Whisperer," stated that this report "provided almost no clear answers for the Federal Reserve." He noted that such ambiguity is "unlikely to substantially change" the Fed's current focus on inflation. What truly determines whether to raise interest rates in September is not the employment data, but the inflation data to be released in the coming weeks.

Timiraos pointed out that this jobs report released two sets of opposing signals: weak job growth in July and significant downward revisions to job growth in the previous two months indicate that the labor market has not reaccelerated. Meanwhile, the decline in the unemployment rate suggests that the job market has not yet loosened enough to reassure the Federal Reserve. Therefore, for the FOMC decision-makers—three of whom already voted for a rate hike at last week's monetary policy meeting—this report is unlikely to tip the policy balance.

Wall Street economists generally believe that this is a jobs report from which both hawks and doves can find support for their respective positions. The decline in employment numbers supports maintaining the status quo, while the drop in the unemployment rate indicates that the labor market remains resilient. Going forward, the Fed's focus will return to inflation data, particularly the CPI and PCE figures to be released in the coming weeks.

Job Growth Unexpectedly Turns Negative; Unemployment Rate Hits New Low in Over a Year

The July non-farm payroll report released by the U.S. Bureau of Labor Statistics (BLS) showed:

• Non-farm employment decreased by 23,000 in July, significantly deviating from the market expectation of an increase between 50,000 and 140,000;
• The combined number of new jobs added in May and June was revised down by 103,000, indicating that the previous job market was weaker than initially reported;
• Private sector employment increased by 30,000 in July;
• The unemployment rate fell from 4.17% to 4.09% in July, marking a new low since June 2025;
• The labor force participation rate dropped from 61.5% in June to 61.4% in July, the lowest level in nearly five and a half years;
• Average hourly earnings rose by only 0.1% month-on-month in July, below the market expectation of 0.3%. Year-on-year, average hourly earnings rose by 3.2% in July, below the market expectation of 3.5%, marking the lowest year-on-year increase in over five years.

On the surface, the decline in employment numbers seems to indicate a significant cooling of the labor market. However, the further drop in the unemployment rate suggests that the job market still maintains a certain degree of resilience. These two most important indicators send completely different signals. Wage data serves as an important dovish signal. Contrary to previous market concerns that an "overheated labor market might reignite inflation," the slowdown in hourly wage growth shows that supply and demand in the job market are continuing to rebalance.

Timiraos: Non-Farm Report Barely Clarifies the Fed's Most Pressing Concerns

As a key window for the market to observe the Fed's policy direction, Nick Timiraos's commentary on this report can be summarized in one sentence: It barely clarifies the Fed's most pressing current concerns.

He wrote:

"The July jobs report will be a messy report for the Federal Reserve."

In Timiraos's view, the significance of the report lies not in telling the market what the Fed should do next, but in illustrating that current data is still insufficient to support any definitive conclusions.

On one hand, slowing job growth, the return to negative job growth in July, and significant downward revisions to data from the previous two months all indicate that the labor market is not reaccelerating. This undoubtedly weakens the rationale for resuming rate hikes in September.

On the other hand, the continued decline in the unemployment rate means that the labor market is still quite far from being truly weak, making it difficult for the Fed to conclude that the economy has cooled significantly.

Therefore, this report does not change the core of the policy discussion.

Moderate Future Inflation Data Will Strengthen Case for Holding Rates Steady; Strong Data Could Gain More Support for Hikes

Timiraos believes that what truly determines the outcome of the September FOMC meeting is not employment, but inflation.

He pointed out that last week's Federal Open Market Committee (FOMC) meeting decided to keep interest rates unchanged. However, among the 12 voting FOMC members, three voted against the rate decision because they supported a rate hike. This shows that there are clear divisions within the FOMC regarding the need for further policy tightening.

Future inflation data will determine whether this divergence widens or narrows.

Timiraos stated:

"Whether price pressures are intensifying or receding will determine whether more officials conclude that maintaining the current interest rate level will no longer achieve the expected return of inflation to the target value.

If inflation data is moderate, it will strengthen the case for keeping interest rates unchanged (as two consecutive months of low inflation data begin to show trend characteristics rather than just short-term fluctuations); conversely, if (inflation) data is strong, it will cast doubt on inflation expectations again and may prompt dissenting officials to seek a fourth vote against holding rates."

In other words, against the backdrop of a labor market that has neither reheated nor significantly deteriorated, the Fed's next policy move depends almost entirely on price data to be released in the coming weeks.

If inflation data such as the CPI continues to be moderate, then two consecutive months of low inflation will increasingly look like a trend rather than statistical noise, giving the Fed more reason to keep interest rates unchanged. If these inflation figures strengthen, it means the Fed's expectation that inflation can fall back to the 2% target is challenged again, and the camp supporting a rate hike may gain another vote.

Decline in Unemployment Rate Does Not Mean Job Market Is Strengthening Again

Timiraos also provided a specific explanation for a point that the market tends to overlook.

He pointed out on social media that the drop in the unemployment rate to 4.09% in July was mainly due to a decrease in the number of people looking for work, while the number of unemployed people in the statistical scope also decreased simultaneously.

In other words, the decline in the unemployment rate was not entirely driven by a substantial increase in jobs, but was the result of changes in labor supply.

However, the unemployment rate has fallen from 4.54% last November and 4.44% in February this year to the current 4.09%, hitting a new low since June 2025. This means that the Fed still cannot conclude that the labor market has loosened sufficiently.

Job Losses Concentrated in Public Education, Possibly Due to Seasonal Factors

Timiraos also pointed out another characteristic of this jobs report: job losses mainly came from the government sector, not private enterprises.

Data from this report shows that private sector employment increased by 30,000 in July. Although this is lower than the average increase of 40,000 over the past three months and 54,000 over the past six months, it remains positive growth.

Meanwhile, overall non-farm employment decreased by 23,000 in July, concentrated mainly in public education jobs.

Citing analysis from some economists, Timiraos pointed out that this may reflect seasonal adjustment factors brought about by school summer closures, rather than necessarily indicating a sudden deterioration in government employment demand.

Therefore, although the headline figure was surprising, the internal structure of the job market may not be as weak as the surface numbers suggest.

Wall Street: A Report Where "Both Doves and Hawks Can Find Justification"

Regarding this jobs report, several Wall Street economists believe that it fails to provide clear policy signals to the Fed, as it contains factors supporting both a pause in rate hikes and a continued focus on inflation.

Chris Low, Chief Economist at FHN Financial, stated that without the decline in the unemployment rate, this report could have become an important basis for supporting a policy shift. However, the unemployment rate remains at a relatively low level, making it difficult for the Fed to declare that the labor market has significantly deteriorated.

Eric Winograd, an economist at AllianceBernstein, believes that job growth is slowing and wage pressures are declining, but current data is still insufficient to prove that the economy is rapidly stalling. The Fed still needs more evidence on inflation.

Satyam Panday, an economist at S&P Global Ratings, stated that weakening job growth and declining wage growth indicate that the labor market is rebalancing. However, the decline in the unemployment rate means the market has not yet shown significant deterioration, so policymakers still need to wait for more data.

Kathy Bostjancic, Chief Economist at Nationwide, called this a "complex" jobs report. Job losses and cooling wages support the Fed remaining patient, but the decline in the unemployment rate indicates that the labor market still possesses resilience.

Bloomberg economists Anna Wong and Andrew Sacher believe that the trend of labor market cooling is continuing, but it is currently insufficient to force the Fed to rapidly change its policy direction. Future inflation data will remain the core variable for the September meeting.

Morningstar economist Caldwell also pointed out that the continuous decline in wage growth to around 3% indicates that there is still a certain degree of excess supply in the labor market, which provides space for the Fed to remain on the sidelines regarding inflation issues.

Market Refocuses on Inflation; Fed's September Move Remains Uncertain

Overall, the July non-farm report did not provide clear policy signals to the Federal Reserve.

On one hand, the decrease in employment numbers, significant downward revisions to previous growth figures, and wage growth dropping to its lowest level in over five years all support the Fed continuing to exercise patience.

On the other hand, the unemployment rate falling to a new low in over a year indicates that the labor market remains resilient, meaning the Fed cannot completely rule out the possibility of further policy tightening.

As Timiraos summarized, this jobs report is "difficult to interpret" for the Fed. It did not change the policy direction but instead kept the focus on inflation.

As the September FOMC meeting approaches, the upcoming CPI and PCE data will determine whether the Fed maintains interest rates unchanged or reconsiders a rate hike.