NEW YORK — U.S. employment improved far beyond expectations last month, pushing up the odds that the Federal Reserve will raise its benchmark rate this month. The reading dulled recession concerns and left inflation as the main worry. Global food prices and international oil prices are climbing, and gasoline and diesel prices in the U.S. continue to rise. Even so, the market is not as convinced as before that a rate hike or a hold is a foregone conclusion. Many believe current inflation is far above the Fed's 2% target, but a considerable number also see price growth slowing on a trend basis. Against this backdrop, President Donald Trump again made the contradictory argument that "the jobs numbers came in strong, so the Fed should cut rates further." He also threatened to halt trade with countries that run surpluses with the United States unless rates come down. With the trade deficit widening despite tariffs, he blamed other countries' practices and the Fed's misjudgment. In fact, a closer look at the data shows the widening gap stems from rising imports of semiconductors, computer peripherals and other infrastructure tied to massive artificial intelligence investment by Big Tech. Yet Trump told the public it was the result of a strong dollar caused by high interest rates. Analysts say Trump could shake the order of trade and monetary policy more forcefully ahead of the November 3 midterm elections.
August Jobs Beat Expectations; Yields Jump and September Hike Odds Rebound
The Bureau of Labor Statistics said on the 4th that nonfarm payrolls rose by 162,000 last month from July. It was the largest gain in five months and more than triple the consensus forecast compiled by Dow Jones for a 53,000 increase. Employment figures for June and July, previously seen as relatively weak, were also revised sharply higher. Under the revision, July employment swung to a gain of 21,000 from an initially reported decline of 23,000, a 44,000 improvement. When the July jobs report was released, the market had expected a gain of about 80,000, so the gap with the actual figure narrowed. The June gain was also raised by 11,000 to 31,000 from 20,000. Combined, nonfarm payrolls for June and July were 55,000 higher than initially reported.
The unemployment rate held at 4.1% last month, unchanged from July and in line with forecasts. Average hourly earnings came to $37.75, up 0.3% from July and 3.1% from August a year earlier.
With employment improving beyond expectations, the odds that the Fed will raise rates at its Federal Open Market Committee meeting on the 15th and 16th rose again. According to CME's FedWatch, the federal funds futures market raised the probability of a hike at this month's FOMC meeting to 59.4% from 49.4% the previous day. The odds of a hold fell to 40.6% from 50.6%.
The bond market moved in tandem. The two-year Treasury yield, which is sensitive to monetary policy, jumped 0.091 percentage point from the previous session immediately after the jobs report, reaching 4.425% intraday. The 10-year yield, the global bond market benchmark, rose to 4.812%, and the 30-year yield, a reference for mortgage rates, climbed to 5.275%. On expectations that higher rates would improve returns on dollar assets, the dollar index, which tracks the greenback against six major currencies, rebounded 0.27% to 99.18. As tightening odds rose, all three major New York indexes fell: the Dow Jones Industrial Average dropped 0.51%, the Standard & Poor's 500 lost 0.38% and the Nasdaq Composite slipped 0.29%.
Wall Street had leaned toward a hike since Chair Kevin Warsh delivered a hawkish keynote address at the Fed's economic policy symposium in Jackson Hole, Wyoming, on the 28th of last month, then partly revised its expected path as dovish officials voiced optimism on prices one after another. New York Fed President John Williams said on the 2nd that "the U.S. economy is showing strength and financial markets are moving." Governor Christopher Waller said on the 3rd that "recent data show some signs of disinflation, and if the current trend continues, I would support holding rates." Waller said on the 4th that "the August jobs report will not have a major impact on my September rate decision," signaling he would watch next week's price data.
Trump Says He Will Halt Trade With Surplus Nations if the Fed Doesn't Cut; Reality Is a Deficit Driven by AI Infrastructure
As always, Trump immediately touted the solid economic data. On his social media platform Truth Social on the 4th, Trump said "great jobs numbers were just released" and again urged the Fed to cut rates to the lowest level in the world, arguing that U.S. credit had improved. Trump said that unless rates come down, "we will stop trading with countries where we run deficits," and claimed the Supreme Court had strongly affirmed in its "stupid and costly tariff ruling" that "the president has absolute authority to do so." He added that "the Fed board, with its great new leader, must get smart and be patriots for change," and that "high rates expose America to a very unfair disadvantage, and I will not just stand by and watch."
The remarks were read as pressure on the Fed to cut rates at its FOMC meeting on the 15th and 16th. They were also interpreted as a signal that he could start a new trade war with major economies ahead of the midterm elections, as with the tariffs of up to 50% imposed on Canada and vice versa recently.
Speaking to reporters at the White House in Washington the same day, Trump insisted that "some countries have rates of 0.5% while we're at 4%," adding it "should be 1% or 0.5%." He also said that "if we do no trade at all with Canada, we save $90 billion," and stressed that "we are losing $200 billion a year to the European Union, and if we don't trade with them, we have nothing to lose." On Mexico, he said "we are losing $195 billion a year," repeating his position that trade with these countries could simply be halted if deficits persist. Unlike his Truth Social message, he named specific countries that run surpluses in trade with the United States.
Trump's linking of the trade deficit to interest rates is presumed to reflect how serious fiscal deterioration and price pressures have become heading into the midterms. According to the Commerce Department, the U.S. recorded a record annual goods trade deficit of $1.2409 trillion last year. By country, the largest deficits were with the EU ($218.8 billion), China ($202.1 billion), Mexico ($196.9 billion), Vietnam ($178.2 billion), Taiwan ($146.8 billion), Ireland ($114.2 billion), Germany ($73.0 billion), Thailand ($71.9 billion), Japan ($63.9 billion), India ($58.2 billion), South Korea ($56.4 billion) and Canada ($46.4 billion).
This year, tariffs helped cut the cumulative deficit for January through July by 29.6% from the same period a year earlier. The problem is that the deficit has widened recently because of astronomical AI investment by U.S. Big Tech. The July trade deficit reached $88.6 billion, up 24.4% from June on AI infrastructure investment. That was the highest since March last year, just before reciprocal tariffs took effect. Imports of capital goods such as computers, peripherals and semiconductors used in AI infrastructure surged 11.4% to $14.4 billion, the largest monthly increase since 1993. By partner, July deficits were largest with Mexico ($27.5 billion), Vietnam ($23.3 billion), Taiwan ($18.1 billion), China ($15.2 billion), South Korea ($10.4 billion) and the EU ($8.9 billion). As AI infrastructure drives the deficit, the ranking of countries running surpluses with the U.S. is shifting considerably.
Even as the U.S. trade deficit tilts toward AI rather than traditional sectors, the root causes Trump presents to the public are very simple: other countries' unfair trade practices and the Fed's high rates. His economic logic holds that because the Fed has not cut rates once this year, bond yields have risen, lifting the dollar and putting the U.S. at a disadvantage in trade. Trump also repeatedly argues that were it not for the Fed, the U.S. could pay the world's lowest rates of 0% to 1% on more than $40 trillion in federal debt. That is why analysts say he has finally played an extreme card combining trade and monetary policy, after failing to fix the trade balance as he wanted with the midterms approaching. On Truth Social on the 4th, Trump said "stopping trade would be better than tariffs," hinting he could carry it out.
Gasoline and Food Prices Rise, Putting Midterms at Risk; the 11th CPI Is the Turning Point
The key point is that while the Fed may hold, the chance of a cut is close to zero. No one in the market currently sees any probability that the Fed will lower rates at its FOMC meeting on the 15th and 16th. Even Warsh, whom Trump appointed himself, warned at Jackson Hole on the 28th that "if underlying inflation is not moving toward the Fed's inflation target at a sufficient pace, we will do what we have to do."
International oil prices rose again on the 4th amid continued uncertainty in the Middle East. On the New York Mercantile Exchange, West Texas Intermediate crude futures for October delivery settled at $91.48 a barrel, up 0.20% from the previous session. WTI has risen for five consecutive sessions since the 31st of last month. On London's ICE Futures Exchange, Brent crude futures for November delivery closed 0.80% higher at $96.28 a barrel. Prices were driven up in particular by concerns over supply disruptions spreading from the Strait of Hormuz to the Bab el-Mandeb Strait, a shipping chokepoint at the entrance to the Red Sea. According to AFP and other outlets, Yemen's pro-Iran Houthi rebels and government forces clashed fiercely from the 3rd, leaving at least 129 dead in a single day. It was the deadliest single armed clash in Yemen's civil war in recent years. The fighting was triggered as Houthi forces advanced near the Bab el-Mandeb Strait, a critical bottleneck through which the world's crude oil and natural gas must pass to reach the Suez Canal.
The national average U.S. gasoline price stood at $4.15 a gallon as of the 4th, a record for the month of September, according to the American Automobile Association the same day. That was far above the $3.80 a gallon seen on the July 4 Independence Day holiday during the peak summer driving season. Diesel was $5.85 a gallon, surpassing the previous record set in June 2022.
Gasoline prices in the U.S. typically fall around the September 7 Labor Day holiday as summer road-trip demand wanes, but this year is following an unusual path. A pressed Trump summoned refiners to the White House on the 1st and personally called for lower prices. He also had U.S. companies pursue new deals to secure Venezuelan crude and directed the Justice Department to investigate whether energy firms were profiteering. CNN reported that gasoline has never been this expensive over the Labor Day holiday, calling it another blow to a president who campaigned on cheap energy.
The UN Food and Agriculture Organization's world food price index also rose 1.9% last month to 133.3 from 130.8 in July, the highest since November 2022 (135.7), when the war in Ukraine broke out, the agency said on the 4th. The increase reflected a convergence of heat waves and drought in Europe, weather anomalies including El Nino, and the war in Iran. By category, the sugar index rose 11.9% from July, grains 2.2%, wheat 2.6%, corn 2.5%, vegetable oils 1.1%, meat 1.0% and dairy 2.3%. At the White House the same day, Trump signed an executive order to lower beef prices and protect small and midsize ranchers in a meatpacking market dominated by large corporations.
It remains unclear how far Trump will press the Fed by holding extreme trade policy hostage, and how severe a step "halting trade" would actually mean in practice. Whether South Korea would be included is also worth watching. For now, the Fed appears set to disregard Trump's threats and focus on the August consumer price index due on the 11th, the most important inflation reading before this month's FOMC meeting.
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