US August Nonfarm Payrolls Preview: How Much Will It Impact the Fed's September Rate Hike Decision?

TradingKey - The U.S. Bureau of Labor Statistics will release the August nonfarm payrolls report on September 4 Eastern Time. As the last full set of employment data before the Federal Reserve's September policy meeting, this report will help policymakers assess whether the labor market can withstand further rate hikes and whether labor costs are becoming a new driver of inflation.

A Reuters survey shows that the market currently expects U.S. nonfarm payrolls to increase by only about 58,000 in August, with the unemployment rate holding at around 4.1%. In comparison, nonfarm payrolls unexpectedly dropped by 23,000 in July, and data for May and June were also sharply revised downward. Consecutive signals of weakness in the U.S. labor market have made market sentiment toward economic growth prospects noticeably more cautious.

Latest data further reinforces this view. The ADP report showed that the U.S. private sector added only 38,000 jobs in August, below the market expectation of 47,000 and marking the smallest gain in seven months.

Will 58,000 Jobs Added Satisfy the Market?

If August nonfarm payrolls increase by only around 50,000 to 60,000 jobs, on the surface it would signal a noticeable slowing in the labor market, but for the Federal Reserve, this figure may not be sufficient to justify an immediate pivot to policy easing.

On the one hand, employment already registered negative growth in July, and a sharp cooling for the second consecutive month indicates that corporate hiring demand is indeed weakening. On the other hand, recent U.S. job openings and layoff data have not deteriorated significantly at the same time, suggesting that the labor market may be closer to a slow-cooling phase of "low hiring and low firing," rather than a rapid deterioration.

What the market hopes to see is not "the stronger the job market, the better," but rather an orderly slowdown in hiring while avoiding a rapid economic stall.

From the perspective of the stock market, outcomes that are either too strong or too weak both carry risks. Employment growth significantly exceeding expectations would prompt the market to reassess the necessity of further rate hikes by the Fed and could drive U.S. Treasury yields higher. However, if job growth turns distinctly negative, the market might worry that the U.S. economy is accelerating downward, thereby increasing the pressure from recession trades.

Therefore, the market currently prefers to see a "moderate cooling," with job growth continuing to slow without an out-of-control deterioration. Such an outcome would ease the Fed's concerns about an overheating labor market without rapidly pushing up recession expectations.

What Signals Have Fed Officials Sent Recently?

Although there remains disagreement within the Federal Reserve over the timing of rate hikes, a majority of senior officials have shifted their policy focus toward preventing inflation from spiraling out of control again.

Federal Reserve Chair Kevin Warsh stated in his Jackson Hole speech that policymakers must confirm underlying inflation is returning to the 2% target at a sufficiently clear pace; otherwise, the Fed will still need to take action. While he did not explicitly commit to a September rate hike and expressed support for waiting for more data, his overall tone was distinctly hawkish.

Federal Reserve Governor Michael Barr took a more direct stance, arguing that if upcoming data fails to prove inflation is cooling on a sustained basis, the Fed should decisively raise interest rates; only when inflation shows a credible downward trend will policymakers have more time to observe. Barr also believes that the U.S. economy and labor market remain stable, meaning the Fed currently has no need to abandon tightening options due to growth risks.

Meanwhile, statements from regional Fed officials were similarly cautious. Cleveland Fed President Beth Hammack argued that the time has come to take action to control inflation. She pointed out that current interest rates are not significantly restricting the economy, and if high inflation persists for too long, businesses and consumers might gradually form expectations of persistently high prices, making it harder to control inflation in the future.

Kansas City Fed President Jeffrey Schmid also stated that inflation remains stubborn, while the current policy rate does not appear to significantly restrain economic activity. However, he has not explicitly committed to supporting a September rate hike, preferring instead to further observe employment, demand, and inflation data.

In addition, the Fed's July meeting saw three dissenting votes in favor of a 25-basis-point rate hike, cast by Hammack, Neel Kashkari, and Lorie Logan. This indicates that a relatively clear hawkish camp has formed within the Committee. Even if August nonfarm payroll growth slows moderately, as long as wage growth and inflation remain elevated, these officials may still continue to support rate hikes.

How Nonfarm Payroll Data Will Impact the Fed's September Decision?

As energy prices rose, supply chain pressures built up, and Federal Reserve officials issued hawkish signals, market pricing for a September rate hike climbed rapidly. The latest interest rate market data showed that the probability of a 25-basis-point Fed rate hike in September once reached about 68% to 70%, significantly higher than around 37% a week ago.

This has also further heightened the importance of the August nonfarm payrolls report.

If employment comes in significantly stronger than expected while wage growth remains robust, the market may further raise its pricing for a September rate hike. Short-term Treasury yields and the U.S. dollar could gain support, while high-valuation tech stocks may face pressure.

Conversely, if nonfarm payrolls are significantly weaker than expected—especially if job growth approaches zero or turns negative again—while wage growth also begins to slow, the market may re-bet that the Fed's tolerance for an economic slowdown is rising, naturally cooling September rate hike expectations.

However, job market cooling alone may not be enough to alter the policy path. Inflation remains above the 2% target, and the August Consumer Price Index will be published on September 11. Even if nonfarm payrolls are weak, as long as wage pressures do not ease and the CPI exceeds expectations again, the Fed may still choose to raise rates.