A robust United States jobs report has significantly influenced market expectations regarding Federal Reserve policy, with the probability of a September rate hike now exceeding 60% according to BNY Markets strategist John Velis [1]. This shift in sentiment comes despite Federal Reserve Governor Christopher Waller's more cautious remarks, which had briefly tempered expectations for a rate increase last Thursday [1].
Velis notes that the strong employment data has reinforced the likelihood of imminent rate hikes, stating, 'After an exceptionally strong jobs print on Friday, even Governor Christopher Waller’s somewhat equivocal comments on Thursday don’t seem to be enough to change our view that a rate hike is imminent' [1]. He further explains that the expected equilibrium neutral rate, as observed across various instruments, remains just above 4%, while current rates are approximately 40 to 50 basis points below that level [1].
BNY's base case scenario anticipates the Federal Reserve raising rates two or three times over the coming months, potentially pushing policy above the neutral rate of 4%. Velis suggests that three consecutive hikes could extend into 2027, depending on economic conditions [1]. However, he also projects that by the second half of the year, rates may begin to decline as inflation eases—helped by base effects—and as tighter financial conditions slow the economy [1].
The market implications are significant, with the strong jobs data keeping the possibility of further rate hikes 'live' and influencing expectations for the trajectory of US monetary policy in the near term [1].
CONCLUSION
Stronger-than-expected US jobs data has reignited expectations for Federal Reserve rate hikes, with markets now pricing in a greater than 60% chance of a September increase. While further hikes are anticipated in the coming months, BNY expects rates to eventually decline as inflation moderates and economic growth slows.