Can the Fed Still Hike Rates? Wall Street Says 'Wait and See' After Jobs Report, Rate Hikes May Kill Manufacturing Recovery

U.S. nonfarm payrolls unexpectedly declined by 23,000 in July, while June’s increase was significantly revised down from 57,000 to just 20,000, prompting markets to question whether the Federal Reserve (Fed) still has the grounds to raise interest rates in September. However, Wall Street analysts generally agree that one month of weak data is insufficient to prove the labor market has entered a recession, though it is enough for the Fed to reassess the damage rate hikes could inflict on employment—making a September hold increasingly likely.

The U.S. unemployment rate fell from 4.2% to 4.1% in July, primarily due to a continued decline in labor force participation. Last week, the Fed voted 9-to-3 to keep interest rates unchanged at 3.50%–3.75%, with three dissenting members advocating for a 25-basis-point hike. After the jobs report, futures markets reduced the probability of a September rate hike from 55% to 40%.

'Hiking Could Hurt Manufacturing First: The Cure Might Be Worse Than the Disease'

Brian Jacobsen, Chief Economist at Annex Wealth Management, pointed out that the Fed must now proceed with extreme caution, as rate hikes typically impact the manufacturing sector first and most severely. With manufacturing employment only just showing signs of recovery, tightening policy to curb inflation could end up stifling this nascent improvement.

Jacobsen believes that service-sector inflation is gradually cooling, while rising goods prices are mainly driven by tariffs and energy costs—not excessive monetary easing. In such a context, rate hikes may not effectively address inflation’s root causes, and the economic cost could outweigh the benefits. He also noted that July’s weak employment figures might reflect seasonal factors rather than structural deterioration.

He predicts that facing structural inflation issues, Fed Chair Powell may prefer shrinking the balance sheet over hiking rates. If too many policymakers still push for a hike in September, Powell himself might cast a dissenting vote.

One Month of Data Isn’t a Trend—but Enough to Pause

Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, stated that despite the negative nonfarm payroll number in July, the overall U.S. labor market remains healthy, so one data point should not be overinterpreted. 'One number does not make a trend,' he said. However, this report clearly gives the Fed more room to pause rate hikes in September.

Saglimbene noted that recent Fed policy discussions have heavily emphasized inflation control, but weak employment data could rebalance the conversation, making policymakers place greater emphasis on their statutory mandate of maximum employment. If future hikes risk further suppressing business hiring, the Fed has justification to wait and assess policy impacts. He expects the Fed will ultimately refrain from hiking in September.

Lindsay Rosner, Head of Diversified Fixed Income Investments at Goldman Sachs Asset Management, also favors a hold. She said history doesn’t repeat exactly but often rhymes—and this marks the third consecutive year where July job growth has lost momentum during midsummer, suggesting seasonal factors may be amplifying the weakness.

Rosner emphasized that upcoming inflation data will still be the ultimate decider on rate hikes, but slowing job growth supports keeping rates unchanged in September. In short, Wall Street isn’t immediately declaring recession due to the negative payroll print, but widely agrees that with inflation drivers not fully responsive to rate hikes and rising employment risks, the Fed has no need to rush into further tightening.