June jobs data eases rate fears as unemployment holds at 4.3%

The first nonfarm payroll report under Federal Reserve Chair Kevin Warsh came in below the prior month's blockbuster reading, easing market fears that the central bank would need to raise rates as soon as September.

"This employment report lets anyone worried about the Fed raising rates breathe a sigh of relief," said Adam Sarhan, chief executive officer at 50 Park Investments in New York. "It's not too hot, not too cold."

Futures on the S&P 500 rose after the release, while Treasury yields edged lower as traders reduced bets on a September rate increase. The data follows a stronger-than-expected prior report that triggered a broad market selloff on concern that strong hiring would push inflation higher and force the central bank to tighten. The unemployment rate held at 4.3%, while inflation eased to 4.2% in May from a three-year high, helped by declining gas prices after the Iran peace agreement.

The question now is whether Warsh, who took office May 22, will follow through on his pledge to bring inflation back to the Fed's 2% target — even if that means raising rates. Markets are pricing roughly a 50% probability of a quarter-point hike to about 3.9% at the September FOMC meeting, according to fed funds futures. Nine of 18 Fed officials projected at least one rate increase this year in the June dot plot, though Warsh declined to submit his own forecast.

Warsh told a central bank conference in Sintra, Portugal, that the Fed would maintain its independence and prioritize price stability. "We're going to deliver price stability," he said, pushing back against President Donald Trump's calls for lower rates. The remarks marked a shift from Warsh's earlier stance during his campaign for the job, when he advocated for rate cuts.

The Fed chair has also ended the practice of forward guidance, which since 2003 had given Wall Street advance notice of the central bank's likely policy moves. "Absent, also, is so-called forward guidance," Warsh said after the June FOMC meeting, stripping investors of a key tool for anticipating rate decisions. The change introduces a level of uncertainty that markets have not contended with in more than two decades.

Rate Path Hinges on Inflation Data

Whether the Fed actually delivers a September hike depends on the trajectory of inflation in the coming months. Gas prices have declined following the Iran peace agreement, suggesting inflation may have peaked. Warsh said there are signs that persistent inflation risks have moderated, citing declining inflation expectations in surveys and bond prices.

If gas prices continue to fall back to prewar levels, Fed officials may wait to see where inflation settles before making a move. At the same time, Warsh has emphasized that AI could expand the economy's productive capacity over time and reduce inflationary pressures, though economists caution that such effects may take years to materialize. He has established five task forces at the Fed to study AI's impact on productivity and the economy.

"This is as exciting a time and also as consequential a time to be a central banker that I can think of at any point, maybe outside of a crisis, in my adult lifetime," Warsh said.

This article is for informational purposes only and does not constitute investment advice.