WASHINGTON — Expectations that the Federal Reserve will eventually raise interest rates remained elevated as inflation continued to run well above the U.S. central bank's 2% target, though investors pared bets on an immediate move after weaker-than-expected June employment data pointed to a cooling labor market.
The Labor Department reported on Thursday that nonfarm payrolls increased by 57,000 jobs in June, well below economists' forecasts, while gains for May were revised lower. The unemployment rate edged down to 4.2%, largely because fewer people participated in the labor force. The figures prompted financial markets to reduce expectations of a rate increase at the Federal Reserve's July policy meeting, although traders continued to assign a higher probability to a move later in the year, particularly in September.
Fed funds futures implied less than a 20% chance of a July rate increase, down sharply after the jobs report, while pricing still suggested roughly a 60% probability of a September hike. The Federal Reserve's benchmark policy rate currently stands in a target range of 3.50% to 3.75%.
Inflation has remained persistently above the Fed's goal despite restrictive monetary policy. Policymakers last month raised their projections for inflation and signaled that higher borrowing costs could still be needed if price pressures fail to ease. Nine of the Federal Open Market Committee's 19 participants projected at least one rate increase before the end of 2026, compared with none making that forecast three months earlier.
San Francisco Federal Reserve President Mary Daly said on Thursday that monetary policy was "slightly restrictive" but stressed that uncertainty surrounding inflation and economic growth meant the next policy decision remained data dependent. She cited persistent inflation risks alongside continued labor market resilience and strong business investment linked to artificial intelligence.
Some economists cautioned that underlying wage pressures and resilient demand could keep inflation elevated. Tim Duy, chief U.S. economist at SGH Macro Advisors, said recent regional Federal Reserve surveys pointed to renewed wage growth that could warrant tighter policy "sooner than later" if inflation does not moderate.
Markets initially viewed recent inflation readings as strengthening the case for additional tightening after the Fed revised its economic projections in June. However, Thursday's softer employment report shifted investor focus toward signs of slowing economic momentum, reinforcing expectations that policymakers will wait for additional inflation and labor market data before deciding whether further rate increases are necessary.
