FILE – A job seeker waits to talk to a recruiter at a job fair Aug. 28, 2025, in Sunrise, Fla. (AP Photo/Marta Lavandier, File)
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The U.S. economy unexpectedly lost 23,000 jobs in July, a surprisingly weak report that quickly shifted expectations for the Federal Reserve’s next move on interest rates. A Dow Jones poll of economists had forecast a median gain of 83,000 jobs, putting the headline number 106,000 below expectations.
Now add in revisions that brought the May and June numbers down by 103,000 from previously reported levels, along with an earlier revision that brought May down an additional 43,000. Taken together, the July miss and downward revisions amount to a 252,000-job gap from what had previously been expected or reported.
The numbers show a jobs picture considerably weaker than expected. With all the uncertainty throughout the economy, what the Fed will decide next is tough to guess.
Jobs Report Shifts Fed Rate Expectations
The Federal Reserve sets the federal funds rate, which is a range of rates, the top and bottom differing by a quarter percentage point, that banks charge one another for short-term loans without collateral. Currently, it is 3.50% to 3.75%. The next time the Fed’s Federal Open Market Committee will consider a change in rates will be September 16, 2026.
As of Thursday, August 6, markets were pricing in a 55.0% chance of a quarter-percentage-point (0.25% or also called 25 basis points) rate increase, which would bring the target range to 3.75%–4.00%, and a 45.0% chance that rates would remain unchanged.
Following the July jobs report on Friday, those percentages shifted, according to CME Group’s FedWatch tool, which tracks probabilities of changes to the rate based on 30-Day Fed Funds futures prices. The probability of keeping the current rate swung to 56.1%. The chance of a quarter-point increase to a higher rate range dropped to 43.9%.
FedWatch isn’t a guarantee of what will happen in the future. As this example shows, futures investing — and deductions drawn from it — can shift rapidly. Things could shift multiple ways between now and mid-September. The closer estimates get to the meeting date, the more accurate they tend to be.
Why The Fed’s Next Move Is Complicated
The Fed, by statute, has to consider both maintaining stable prices and sustaining maximum employment, all through using tools to influence monetary policy, one of the main ones being interest rates.
If prices jump via higher inflation, then the theory is for the Fed to increase interest rates, which are seen as a baseline for many types of lending beyond interbank activity. That drives up the cost of buying things, and so reduces demand, which should, in basic economic theory, draw prices down. It’s treated as obvious, although we’ve seen how, depending on the drivers of inflation, higher rates might only increase inflation on even basic products like soap or toilet tissue.
On the other side of the dual mandate, if the unemployment rate is too high, then the other part of the theory is to loosen monetary policy so companies can get more access to money and expand their businesses, hiring people. Again, that didn’t work so quickly after the Great Recession. Companies sometimes expand when they think there’s an opportunity, but adding employees typically happens when there is enough business to support the hiring. If businesses aren’t confident, they’re unlikely to immediately take up an opportunity to borrow money so they can spend more.
Then there is the huge ongoing economic uncertainty: tariff tussles with Mexico and Canada over Donald Trump’s rejection of the USMCA trade agreement, other tariffs that Trump is trying to introduce after many were rejected by U.S. courts, spiraling national debt, and the ongoing conflict in the Middle East and its impact on energy prices.
Atop all this, understanding the Fed and its decision-making process is becoming much harder, thanks to Fed Chair Kevin Warsh, who is putting a premium on undetailed communications and opacity.
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