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The Fed is not at ease despite the slowdown in hiring in June and the downward revision of payroll numbers from earlier months.

Despite a better balance between the supply and demand of labour, the Fed will still need to control inflation given its focus on super core services inflation because monthly increases in earnings and hours worked fuel the inflationary impulse.

The Fed will need to continue pushing against the labour market even as obvious fractures appear, growing part-time work, layoffs in specific areas, and impending payroll adjustments. This is necessary to control inflation. At its meeting in July, the FOMC is anticipated to increase its goal for the federal funds rate by an additional 25 basis points.

The CPI data for June, which will be announced this Wednesday, will be the final significant data release on which Fed members can comment before the blackout period starts in advance of the FOMC meeting on July 25–26.

It is crucial to pay close attention to how the risk-reward balance is changing and what that will signify for the Fed moving forward, with the Fed speakers signalling their intention to hike rates by another 25 basis points at that meeting.

Even though we anticipate annual headline CPI inflation to drop to 3.3%, a large portion of its recent dip can be attributed to base effects in energy prices, which policymakers will probably look past. Core inflation has exhibited far greater tenacity.
 

Market reaction

US markets fell after a string of negative job reports quenched expectations that the Fed will maintain interest rates later this month.

Last week, the Nasdaq 100 dropped 0.9%, and the S&P 500 plummeted 1.2%. As markets processed federal jobs data that missed projections but showed signals that wage inflation remained a challenge to the Fed's fight against price increases, yield on the two-year Treasury crept down to 4.94% on Friday.

Before the central bank's next meeting, Chicago Fed President Austan Goolsbee kept the door open for further data to influence decision-makers. Regarding the Friday jobs report, Goolsbee said, "We're getting to a more sustainable pace, which is what we need to do for inflation."

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