Editor’s Note: The U.S. Bureau of Labor Statistics will release the August non-farm payrolls report on September 4, the last complete employment report before the Federal Reserve’s September 15–16 policy meeting. July’s non-farm payrolls unexpectedly declined by 23,000 jobs, and May and June data were collectively revised down by 103,000 jobs; the latest ADP report further showed that the U.S. private sector added only 38,000 jobs in August, accumulating further signals of slowing hiring.
However, the policy environment facing this non-farm payroll report differs from the traditional notion that “bad news is good news.” Inflation remains above the Fed’s 2% long-term target, and rising energy prices and supply chain pressures have introduced new upside risks. In this context, weaker employment may not directly lead to easing; instead, it could trap the Fed in a dilemma of slowing growth alongside persistent inflation.
TradingKey author Yulia Zeng believes that the market truly seeks not weaker employment data, but a moderate cooling in hiring, stable unemployment rates, and gradual easing of wage pressures. Data that is too strong may reinforce expectations of rate hikes, while data that is too weak could trigger recession trades; only an "orderly cooling" between these extremes may provide a relatively favorable environment for risk assets.
Therefore, the August non-farm payrolls report is more like one piece of the September policy puzzle rather than a standalone switch determining whether to raise rates. Employment data will influence the urgency with which the Fed acts, while the subsequent inflation data may determine the policy direction. Markets must simultaneously assess whether labor demand is gradually cooling or has already slipped into more pronounced economic contraction.
The following is the translated text:
The U.S. Bureau of Labor Statistics will release the August non-farm payrolls report on September 4 at 8:30 AM Eastern Time. According to the official schedule, this is the last complete employment report before the Federal Reserve’s interest rate meeting on September 15–16 and will serve as a key indicator of whether the labor market can withstand further rate hikes.
Predictions from different institutions vary slightly. The market expectation cited in the original text calls for approximately 58,000 new jobs, with the unemployment rate holding steady at 4.1%; however, the median forecast from Reuters’ latest survey is around 56,000. Regardless of which figure is used, the market expects only a modest rebound in August employment, significantly weaker than the expansion rates seen over the past several years.
The underlying data was also weak. The U.S. non-farm payroll unexpectedly decreased by 23,000 in July, far below the market’s prior expectation of an addition of 80,000 jobs; data for May and June were collectively revised down by 103,000. Although the unemployment rate fell from 4.2% to 4.1%, this was partly due to a decline in labor force participation and cannot be simply interpreted as an improvement in the job market.
Before the NFP release, the ADP employment report further reinforced the impression of slowing hiring. In August, the U.S. private sector added 38,000 jobs, below market expectations and the smallest increase in seven months. However, ADP covers only the private sector and uses a different methodology than the official NFP report; it is better suited as a reference for labor market trends rather than a direct predictor of NFP data.
Adding fifty to sixty thousand new users may be the outcome the market can best accept.
If August's non-farm payrolls increase by approximately 50,000 to 60,000 jobs, it表面上 suggests that the labor market continues to cool, but for the Federal Reserve, this outcome may not be sufficient to justify an immediate shift toward policy easing.
On one hand, if employment only shows a modest rebound after declining in July, it suggests that companies' willingness to hire has indeed weakened. On the other hand, job openings and layoff data have not simultaneously deteriorated, indicating the labor market is closer to a "low hiring, low firing" state: companies are not rushing to expand their workforce, nor are they conducting widespread layoffs.
This distinction is crucial. A slowdown in hiring may indicate cooling economic demand; only when hiring and layoffs both worsen does it become a stronger signal of rapidly rising recession risk.
Therefore, the market is looking for an orderly slowdown in employment, not simply worse data. If job growth significantly exceeds expectations, investors may reassess the need for further Fed rate hikes, potentially supporting short-term U.S. Treasury yields and the dollar, while putting pressure on high-valuation tech stocks.
If employment shows another negative growth, market reactions may not be positive. Weak data could shift trading focus from "whether the Fed can pause rate hikes" to "whether the U.S. economy is accelerating into a downturn," thereby fueling recession trades.
According to the author, an addition of approximately 50,000 to 60,000 jobs with a stable unemployment rate could represent a relatively moderate combination: one that eases the Fed’s concerns about an overheating labor market without rapidly amplifying expectations of an economic recession.
The Federal Reserve's focus has shifted back to inflation.
Employment data alone cannot determine September policy because the Fed's primary pressure remains inflation.
Federal Reserve Chair Kevin Warsh, in his Jackson Hole speech, stated that policymakers need to assess whether underlying inflation is rising, falling, or stagnating, while also paying attention to the pace of its change. He noted that although several inflation indicators have declined significantly from their 2022 peaks, the improvement over the past two years has been limited.
This statement did not directly commit to a September rate hike, but sent a clearer signal: as long as there is no sustained evidence of declining core inflation, the Fed will not easily abandon its tightening options due to a single month of weak job growth.
The July FOMC meeting already demonstrated this policy tilt. At the time, the Fed held rates steady, but Beth Hammack, Neel Kashkari, and Lorie Logan voted against the decision, advocating for a 25-basis-point rate hike. The fact that these three officials supported an increase indicates that a clearer hawkish faction has emerged within the Federal Open Market Committee.
The meeting minutes further indicated that many participants believed that if inflation does not continue to decline, further policy tightening may be necessary; some officials also assessed that current financial conditions may not be sufficient to bring inflation back to 2%.
In other words, even if August employment growth moderates, hawkish officials still have grounds to support rate hikes if wage growth and inflationary pressures remain elevated.
Non-farm payrolls determine the urgency, while inflation data determines the policy direction.
As energy prices rise, supply chain pressures intensify, and Federal Reserve officials signal a hawkish stance, the interest rate market has recently seen a notable increase in pricing for a September rate hike.
This probability exhibits significant intraday volatility. Originally, market pricing for a 25-basis-point rate hike in September rose to 68%–70%; after the weaker-than-expected ADP data release, some real-time indicators retreated to approximately 61%–64%. Therefore, a more accurate statement is: the market currently leans toward a hike, but has not yet formed a stable consensus.
The August non-farm payrolls will be the first test of this expectation.
If new job gains significantly exceed expectations and average hourly earnings continue to rise rapidly, the market may further increase the probability of a September rate hike. Short-term U.S. Treasury yields and the dollar could receive support, while growth stocks sensitive to interest rates may face valuation pressure.
If employment approaches zero growth or turns negative again, wage growth will also slow in tandem, reducing the urgency for the Fed to raise rates in September. The market may then reprice for a hold on policy, waiting for more data to confirm the trend.
However, weak employment alone is still insufficient to alter the policy path. The Federal Reserve has a dual mandate of maximum employment and price stability; when employment and inflation send conflicting signals, the policy choice depends on which risk is more urgent.
Therefore, the non-farm payrolls report cannot be evaluated solely based on net job additions. The unemployment rate, labor force participation rate, average hourly earnings, weekly hours worked, and prior revisions are equally important. Weak job growth coupled with high wage growth may still be interpreted as a constraint on labor supply rather than a clear decline in demand; only when both employment and wages cool simultaneously can the case for further rate hikes be more convincingly weakened.
Next, we’ll need to see whether wages and CPI can cool down in tandem.
After the August non-farm payrolls, market attention will quickly shift to the August Consumer Price Index (CPI) released on September 11, followed by the Federal Reserve’s interest rate meeting on September 15–16.
The key to validating the logic of this article is not whether individual data points are below expectations, but whether employment and inflation move in a consistent direction:
If job growth remains modest, wage growth slows, and the CPI cools, the urgency for a September rate hike by the Federal Reserve will clearly diminish;
If employment remains stronger than expected and wages and CPI continue to stay elevated, the rationale for further rate hikes will be strengthened;
If employment clearly worsens while inflation remains high, the Fed will face its most challenging policy combination, and market volatility could also rise.
Therefore, the August non-farm payrolls report is more likely to shift market pricing of rate hike probabilities than to single-handedly determine the final outcome. What will truly influence the September policy decision is the cumulative evidence from employment, wage, and inflation data.