The probability of an interest rate hike in September has surpassed 60%! The U.S. non-farm payrolls were unexpectedly strong, but the real "test" will come next week with the inflation data.

In August, U.S. non-farm payroll growth unexpectedly exceeded market expectations significantly, indicating that the labor market, previously believed to be cooling considerably, still possesses strong resilience, further strengthening the rationale for the Federal Reserve to raise interest rates in September. However, multiple analysts believe that strong employment data alone is still insufficient to ensure the Fed will take action, with the crucial factor determining the direction of September's interest rates being next weeks U.S. inflation data. The data released by the U.S. Bureau of Labor Statistics showed that non-farm payrolls increased by 162,000 in August, surpassing the expectations of all economists surveyed by the media, while the unemployment rate remained unchanged at 4.1%. Meanwhile, the previously reported job losses for July were adjusted in this report, indicating that the actual momentum in the U.S. labor market is stronger than previously thought. Following the release of the data, the market quickly raised its bets on a Fed rate hike in September. According to federal funds futures pricing, investors now expect the probability of the Fed raising rates this month to rise from about 50% to slightly above 60%. However, the latest employment report did not indicate that the labor market is clearly intensifying inflationary pressures, thus the markets focus quickly shifted to the upcoming price data to be released next week. BMO Capital Markets strategist Vail Hartman stated that the latest employment data provides more support for the hawkish faction within the Fed, but is still not sufficient to be a decisive reason for a rate hike on September 16. Hartman noted that, although the market's implied probability of a rate hike in September has risen, the significance of employment data in this months policy decision will still be lower than that of inflation. Olu Sonola, managing director of U.S. Economics at Fitch Ratings, described this employment report as undoubtedly strong, believing it reaffirms the stability of the U.S. labor market. However, he also emphasized that the real factors likely to change the Fed's policy expectations will be the Consumer Price Index (CPI) data to be released next week. The U.S. Bureau of Labor Statistics will release the Producer Price Index (PPI) for August next Thursday, followed by the Consumer Price Index on Friday. In the context of inflation remaining above the 2% target, there has been a clear division of opinion within the Fed regarding the next steps in policy direction. If next week's data shows that price pressures remain stubborn or even accelerate, it may prompt more members of the Federal Open Market Committee (FOMC) to support a rate hike; conversely, if inflation shows significant cooling, the Fed is more likely to maintain interest rates. Yelena Shulyatyeva, a senior U.S. economist at the Conference Board, stated that a large number of Fed officials are currently waiting for next weeks data to confirm whether inflation is consistently trending back toward the 2% target. She stated, Everything depends on next week's inflation data. If the data fails to prove that inflation is consistently improving, the Fed is very likely to choose to raise rates. The Fed has opted to maintain interest rates unchanged during its previous five meetings this year, but divisions in policy are widening. At the July meeting, most officials supported keeping rates steady, but three officials advocated a 25 basis point hike. Since then, two non-voting policymakers have also revealed their inclination to support a rate hike. Fed Chairman Waller further reinforced market discussions about a rate hike during the Jackson Hole Global Central Bank Conference last week. Waller believes that the overall U.S. labor market is stable, and therefore, the current policy focus should be on inflation. Although Waller did not explicitly state support for a rate hike in September, he stressed that the Fed must be convinced that inflation is showing a meaningful slowdown, or else policymakers still have work to do. This statement has been perceived by the market as Waller's closest point to signaling further tightening of monetary policy. However, there are still clear dissenting voices within the Fed. Fed Governor Christopher Waller indicated that he currently prefers to keep interest rates unchanged in September unless next weeks inflation data clearly shows overheating. New York Fed President John Williams believes that recent inflation data is encouraging and already shows that price pressures are easing. In contrast, Cleveland Fed President Loretta Mester holds a noticeably more hawkish stance. Following the release of the non-farm payroll data on Friday, she reiterated that it is time to take action. Mester was one of the three dissenters who supported a rate increase at the July meeting. She believes that both the latest economic data and feedback from businesses in the Cleveland Fed's district indicate that the current monetary policy is still insufficiently restrictive for the economy. Meanwhile, the Feds policy discussions also face rising political pressure from the White House. U.S. President Trump reiterated his public demand on social media on Friday for the Fed to lower interest rates and exerted direct pressure on the new Fed leadership under Waller. Notably, Trump made this request for a rate cut after the August non-farm payroll data significantly exceeded expectations, while the financial markets reacted to the same data in exactly the opposite direction, increasing bets on a September rate hike. Trump stated that the current credit conditions in the U.S. are stronger than they were a short while ago, and therefore should enjoy lower rates, urging the Fed to be smart. Waller was appointed by Trump this year to replace former Chair Powell. However, since taking office, Waller has taken a notably firm stance on inflation and has not shown signs of accommodating the White House's calls for rate cuts. Mark Spindel, Chief Investment Officer at Potomac River Capital, believes that this employment data is very strong but still not sufficient to independently prompt the Fed to take action on rates. He stated, No matter how strong todays data is, I dont think anyone would decide to tighten policy just based on this data. Next weeks inflation report is what will be decisive.