Will The U.S. Jobs Report Help Or Hinder Rate Hikes?

There have been quite a few stories in the investing space lately. We've talked about the Greek debt crisis, Chinese market crash, Iranian nuclear deal and more. However, one of the biggest stories has been on the back burner; Federal Reserve interest rates. However, interest rates are something that we should definitely be talking about as they have the potential to wreak havoc in the market. With that said, key data that may help or hinder the interest rate hike was recently released. That data is the job growth we saw in the US in July. Today, we'll talk about why job growth is a key factor, what we saw from growth in July, and how July's report is likely to affect the Federal Reserves ultimate decision.

Why Jobs Growth Is A Key Factor To Interest Rate Hikes

The Federal Reserve interest rate is very important to the strength and stability of the United States economy. That's why it was reduced during the depths of the economic crisis of 2008 and 2009. Lower interest rates mean that consumers and businesses spend less money on interest; leaving more money available for economic growth. As a matter of fact, that's where the jobs report comes in. The Federal Reserve knows that increasing interest rates while the economy is still struggling is a bad idea. After all, adding stress to an already stressed economy can only make matters worse. When jobs reports are released, they provide a look into the stature of the economy. Strong reports show a strong economy and weak reports prove that the economy still needs work.

What We Saw By Way Of Jobs Growth In July

July's jobs report was a bit mixed. While there was solid news, there was also a factor that was a bit concerning. Here are the details…

• Jobs Added – The positive news came from the amount of jobs that were added in the month. That number came in at 215,000; well into the healthy status of above 200,000 and barely missing economists expectations of 216,000.
• Unemployment – The unemployment rate also proved to be a positive sign for the US economy; coming in at 5.3%. This is the same as what we saw in June and the lowest figure we've seen in unemployment since April of 2008.
• Wage Growth – While most of the data from the report was strong, wage growth proved to be concerning. In July, the hourly wage saw an increase of 2.1% compared to the same month year over year. Unfortunately, that number is only about two thirds of what economists and the Federal Reserve would consider to be “healthy”. As a matter of fact, in healthy economic conditions, we should see wage growth around 3.5% in terms of year over year growth.

How July's Report Is Likely To Affect The Federal Reserve's Decision

The bottom line is that the Federal Reserve has a very tough decision to make; and why jobs growth was positive, July's report could put a damper on things. The Federal Reserve has to take several factors into account before making the decision to raise interest rates; and many are going to hinder their decision. For example, raising rates during economic turmoil around the world could cause issues. Adding in the fact that the energy sector is struggling, the only way that a rate hike would make sense is if all other factors proved to be positive, including the jobs report. With that said, I do think that job additions will help the case for a rate hike. However, wage growth may prove to be a strong deterrent. Although the Federal Reserve has been adamant that it will raise rates before the end of the year, I think we're going to see a change in language as we move into the final quarter. The bottom line is that without solid wage growth, raising rates simply wouldn't be a good idea; and I think the Fed knows that!