July NFP Just Complicated the Fed’s September DecisionGreat British Pound vs. US DollarFX:GBPUSDDeanMullerThe labour market finally blinked. Inflation hasn’t. And Kevin Warsh’s Fed now has a much more uncomfortable decision to make. For much of 2026, the Federal Reserve’s problem has been relatively straightforward to describe: inflation is too high, monetary policy needs to remain restrictive, and policymakers need to accomplish that without breaking anything in the process. Then July’s employment report arrived and, as economic data occasionally enjoys doing, walked into the Fed’s carefully organised meeting room and kicked over the furniture. The U.S. economy lost 23,000 jobs in July, considerably below expectations for roughly 80,000 new jobs. May and June payroll growth was also revised lower by a combined 103,000 jobs. The unemployment rate declined slightly to 4.1%, which initially sounds encouraging, but the details were considerably less flattering. Another 264,000 people left the labour force, pushing the labour-force participation rate down to 61.4%, near a 5½-year low. Private payrolls still increased by approximately 30,000, so this was hardly an economic apocalypse. But the labour market has definitely blinked, and that creates an interesting problem for the Federal Reserve ahead of its September meeting. The question is no longer simply whether inflation is high enough to justify another rate hike. It is increasingly whether inflation is high enough to justify another rate hike despite evidence that the labour market is losing momentum. That is a much harder question, and between now and September 16, markets are going to receive plenty of data with which to argue about the answer. How Bad Was July NFP? We should resist the temptation to declare a recession simply because one number appeared on our screens in red. The headline was certainly poor, but there were some unusual components underneath it. Local government education employment fell by almost 50,000 jobs, retail trade lost around 19,000, and financial activities declined by another 14,000. Healthcare remained one of the brighter areas of the economy, adding approximately 22,000 jobs, although even hiring in that sector has slowed relative to its previous pace. The important takeaway is therefore not that the U.S. economy suddenly stopped creating jobs everywhere. Rather, the margin for error is getting smaller. Wages tell a similar story. Average hourly earnings increased only two cents to $37.62, leaving annual wage growth at approximately 3.2%, while average weekly hours remained unchanged at 34.3 hours. For the Fed, this matters because rapid wage growth can help sustain services inflation. Slower wage growth removes some of that pressure. When weaker payroll creation, softer wages and falling labour-force participation are considered together, the employment side of the Fed’s dual mandate suddenly deserves considerably more attention than it did several weeks ago. But Is the Labour Market Breaking? Not yet, and that distinction is important. The latest JOLTS report showed approximately 7.36 million job openings in June. Hiring actually increased to roughly 5.35 million, while layoffs remained relatively contained at around 1.77 million. That describes something closer to a slow-hire, slow-fire labour market than a recessionary collapse. Companies do not appear particularly enthusiastic about expanding their workforces, but they are not rushing to fire existing employees either. Think of it as the corporate equivalent of opening Uber Eats, scrolling for twenty minutes, deciding everything is too expensive and eventually ordering nothing. For the Federal Reserve, the distinction matters enormously. A collapsing labour market could eventually demand monetary-policy support. A cooling labour market simply tells policymakers that they need to become more careful about how much additional tightening the economy can absorb. Kevin Warsh’s Timing Could Hardly Be More Interesting The timing of July NFP makes the report particularly important. On July 14, Federal Reserve Chair Kevin Warsh told Congress that America’s labour market appeared “broadly stable.” At the same time, Warsh made the Fed’s inflation concerns extremely clear, saying the Committee had “no tolerance for persistently elevated inflation.” That tells us something important about the Fed’s mindset entering the second half of the year. Inflation, rather than unemployment, was the bigger concern. The July FOMC meeting reinforced that view. On July 29, the Federal Reserve kept the federal funds target range unchanged at 3.50%–3.75%, but three policymakers, Beth Hammack, Neel Kashkari and Lorie Logan, wanted to raise rates by another 25 basis points. Three votes for another hike are hardly the behaviour of a central bank preparing to wave a white flag at inflation. The official statement also said that job gains had kept pace with the workforce. Nine days later, July NFP arrived. That does not mean the Fed was necessarily wrong when it made its earlier assessment. Economic conditions evolve and new information changes the picture. But it does mean that the assumption that employment can comfortably absorb additional monetary tightening deserves another look. July NFP has not killed the Fed’s inflation fight. It has complicated it. Because Inflation Hasn’t Gone Anywhere If the jobs report were the only economic number that mattered, the Fed’s decision would be considerably easier. Unfortunately for central bankers, and fortunately for those of us who need things to write about, inflation is refusing to disappear quietly. June headline PCE inflation stood at approximately 3.7% year-on-year, while core PCE, which excludes food and energy, remained around 3.3%. The Federal Reserve’s inflation target is 2%, so while inflation has improved substantially from previous extremes, declaring victory at this stage would be slightly like leaving a marathon at kilometre 32 because you have “basically finished.” CPI offered somewhat better news. June headline CPI declined 0.4% month-on-month, bringing annual inflation down to 3.5%, while core CPI was unchanged for the month and stood around 2.6% year-on-year. The distinction between CPI and PCE is important because the Fed places greater emphasis on PCE inflation, particularly core PCE, when assessing underlying price pressures. PCE is currently telling a considerably less comfortable story. This creates the central conflict heading toward September. Employment momentum is deteriorating, but inflation remains too high. Congratulations, Federal Reserve. You now have two problems. And Then There’s Oil Because apparently monetary policy was not complicated enough already, energy prices remain another major variable. Recent tensions involving Iran and shipping through the Strait of Hormuz have produced significant volatility in crude oil. That matters far beyond energy markets because higher oil prices raise fuel, transportation and production costs throughout the economy. Businesses can absorb some of those costs temporarily, but eventually they face a familiar choice: accept smaller margins or pass those costs on to customers. You can probably guess which option shareholders prefer. This is what makes energy particularly awkward for the Fed. Kevin Warsh cannot lower oil prices by changing the federal funds rate, and unless the Federal Reserve has quietly acquired an aircraft carrier, it cannot secure shipping through Hormuz either. Yet policymakers still have to respond if higher energy prices begin feeding into broader inflation and inflation expectations. That is why the next few inflation reports may matter even more than usual. Has the U.S. Economic Narrative Changed? Yes, but not enough to call it an entirely new regime. Before July NFP, the dominant macro narrative was roughly sticky inflation + resilient employment + continued economic expansion, which allowed the Fed to remain restrictive with another rate hike firmly on the table. After July NFP, the narrative looks more like sticky inflation + weakening hiring momentum + slower headline growth. That means monetary policy can remain restrictive, but the hurdle for another hike has become higher. That distinction is crucial. July’s employment report does not suddenly create a compelling rate-cut narrative. Inflation remains too elevated for that conclusion. Instead, NFP changed the burden of proof. Before Friday, policymakers favouring another hike could argue that inflation remained high, employment was stable and therefore the economy could absorb additional tightening. Now they have to argue that inflation remains sufficiently dangerous to justify another hike despite signs that employment momentum is weakening. That is a considerably more difficult case to make. Markets recognised this almost immediately. Following NFP, market pricing for a September rate increase fell from roughly 57% to around 44%. Treasury yields declined, the dollar weakened, gold rallied and equities initially welcomed the possibility of a less aggressive Fed. But notice what markets did not do: they did not suddenly decide the Federal Reserve was preparing for an aggressive easing cycle. The market simply became less confident about another hike. The Stagflation Question Second-quarter U.S. GDP expanded at an annualised rate of approximately 1.5%, slowing from the first quarter. On the surface, that strengthens the slowing-economy narrative, although traders should be careful about reading too much into the headline number. Underlying domestic demand remained considerably healthier than GDP alone suggests. Consumer spending and investment remained resilient, with AI-related investment providing additional support. For that reason, I would not describe the United States as being in stagflation. Not yet. I would, however, argue that the stagflation conversation is becoming harder to dismiss. Slower headline growth, weak employment creation, inflation above target and the possibility of renewed energy shocks are ingredients worth monitoring. Those ingredients do not necessarily produce stagflation. But they are sitting suspiciously close together on the kitchen counter. The next month of data will tell us whether anyone actually starts cooking. The Road to September Starts With CPI The Federal Reserve meets on September 15–16, but before then policymakers will receive an unusually important collection of economic reports. Rather than obsessing over every candle immediately after every release, traders should focus on one broader question: Does the incoming data confirm or contradict the July NFP story? August 12 — July CPI July CPI is the first major test. If inflation slows meaningfully again, particularly core inflation, the argument for another rate hike becomes considerably weaker. Weakening employment combined with falling underlying inflation would reduce the urgency for additional monetary tightening. If CPI surprises significantly higher, however, the Fed’s problem becomes much more difficult. Weak employment combined with persistent inflation is exactly the scenario that leaves policymakers caught between both sides of their mandate. That makes July CPI potentially one of the most important releases of August. August 13 — July PPI Producer inflation comes next and helps us understand what businesses are experiencing further upstream. If producer costs begin accelerating, particularly because of energy or transportation costs, those pressures can eventually filter through to consumers. Businesses may absorb higher costs temporarily, but they rarely volunteer to do so forever. A strong PPI report following strong CPI would strengthen the argument that inflation remains persistent. A weak PPI reading would provide further evidence that price pressures are cooling. August 14 — Retail Sales Retail sales then tell us how the American consumer is holding up. This matters enormously because consumer spending remains one of the primary engines of the U.S. economy. If households continue spending strongly despite weaker employment creation, the Fed can remain relatively confident that restrictive monetary policy has not seriously damaged demand. If retail sales weaken alongside employment, however, the story becomes considerably more concerning. Weak hiring would then be joined by weaker consumption, giving policymakers another reason to become cautious. August 26 — PCE Inflation July PCE could be the heavyweight release of the month. CPI attracts the headlines, but PCE attracts the Fed. With core PCE still around 3.3% year-on-year, policymakers need clearer evidence that underlying inflation is moving sustainably toward target. If core PCE begins falling convincingly, the case for further tightening weakens. If it remains stubbornly close to current levels, or begins accelerating again, the Fed’s hawks remain very much alive. August 28 — Payroll Benchmark Revision This may be one of the easiest releases for traders to overlook, but it deserves attention. The BLS will publish its preliminary annual benchmark revision to payroll employment. That matters because May and June payroll growth has already been revised lower by a combined 103,000 jobs. If the benchmark revision suggests previous employment growth was materially weaker than originally reported, July’s negative NFP suddenly looks less like an isolated accident and more like part of a longer-running trend. That could meaningfully alter the labour-market narrative heading into September. September Gets Even More Interesting The Fed will receive another major batch of evidence before making its decision. September 1 brings JOLTS, which should provide more information on job openings, hiring, layoffs and worker confidence. The quits rate will be especially useful because workers tend to leave jobs voluntarily when they feel confident that better opportunities exist elsewhere. On September 2, the Fed’s Beige Book will provide anecdotal information from businesses across the twelve Federal Reserve districts. Commentary around hiring, wages, pricing power, consumer spending and investment could become especially useful if the official statistics remain contradictory. Then comes September 4 and August NFP, potentially the most important labour-market report before the FOMC meeting. One disappointing payroll report can be noise. Two consecutive weak employment reports become considerably harder to ignore. July also contained unusual factors, including the nearly 50,000-job decline in local government education employment. If August payrolls rebound strongly, July could increasingly look like an aberration. If August produces another weak report, the Fed suddenly has evidence of a trend. On September 10, markets receive August PPI, followed by August CPI on September 11, only days before the FOMC meets. By that stage, the scenarios should be considerably clearer. Weak NFP combined with soft CPI would make another hike difficult to justify. Strong NFP combined with hot CPI would revive the hawkish argument. Weak employment combined with hot inflation would be the Fed’s least enjoyable option. Then, on September 15–16, Kevin Warsh and the FOMC finally have to make the decision. After weeks of telling everyone that monetary policy is data-dependent, they will finally have all the data they are dependent on. Mostly. Probably. Until the BLS revises it later. How Should Traders Approach the Next Few Weeks? Rather than attempting to predict every individual release, I think traders should monitor whether different markets begin confirming the same macro narrative. Treasury yields may provide one of the clearest signals. If inflation continues slowing and yields decline, markets are likely reinforcing the view that the Fed can remain on hold. If inflation surprises higher and yields rise, the inflation narrative is regaining control. More importantly, traders should ask why yields are moving rather than simply reacting to the direction of the move. The dollar deserves similar treatment. USD weakened after NFP because expectations for additional Fed tightening declined, but currencies are relative instruments. What the Fed does matters, but so does what the ECB, Bank of England, Bank of Japan and other central banks are expected to do. Geopolitical risk can also generate safe-haven demand for the dollar even when U.S. fundamentals weaken. Gold may be particularly interesting because it can benefit from falling Treasury yields, a weaker dollar, geopolitical uncertainty and persistent inflation concerns. But traders should avoid assuming every inflation surprise is bullish for gold. Hot inflation can push real yields higher, increasing the opportunity cost of holding an asset that provides no income. Watching CPI, real yields and the dollar together should provide a much clearer signal. Equities face perhaps the most delicate balancing act. Markets can tolerate some weaker economic data if it reduces expectations for Fed tightening. That is the classic “bad news is good news” environment. But there is a limit. If employment weakness begins damaging consumption and corporate earnings, lower-rate expectations may no longer be sufficient to support valuations. At some point, bad news becomes bad news again. Markets can be surprisingly particular about exactly how much economic weakness they find bullish. Three Scenarios Heading Into September The first scenario is cooling inflation with continued employment weakness. If CPI, PPI and PCE continue moving lower while August NFP disappoints again, the argument for another rate hike becomes significantly weaker. Treasury yields could face downward pressure, the dollar may soften, and gold could remain supported. Equities may initially benefit from lower-rate expectations, assuming the economic weakness does not become severe enough to threaten earnings. The second scenario is reaccelerating inflation with recovering employment. If July NFP proves temporary, August payroll growth rebounds and consumer spending remains healthy while inflation reaccelerates, the narrative quickly changes back toward a resilient economy with persistent inflation. In that environment, the July FOMC hawks suddenly look considerably less isolated. Treasury yields and the dollar could regain support, while rate-sensitive assets would face renewed pressure. The third scenario is easily the most uncomfortable: sticky inflation combined with continued employment weakness. If payroll growth remains poor, consumption softens and inflation refuses to cooperate, the stagflation discussion becomes considerably more serious. The Fed would then face an unpleasant choice between fighting inflation and protecting employment. Cut rates and inflation could worsen. Raise rates and employment could deteriorate further. Hold rates and hope the data improves. Central banking suddenly becomes the economic equivalent of choosing which wire to cut while the timer is counting down. My September Fed View So after July NFP, am I predicting that the Fed will hold rates in September? No. Am I predicting another hike? Also no. That is precisely the point. September remains genuinely data-dependent. July NFP changed the probability distribution; it did not determine the outcome. Before the employment report, the Fed had considerable justification for focusing primarily on inflation. Warsh had described the labour market as broadly stable, three FOMC policymakers wanted another hike, and inflation remained comfortably above target. That story has now developed a crack. Employment fell, previous payroll numbers were revised lower, participation declined and wage growth softened. But inflation has not disappeared, and underlying domestic demand has not collapsed. We are therefore stuck between two competing narratives. The first says July NFP was temporary noise. If employment rebounds and inflation remains sticky, the Fed can continue fighting inflation aggressively. The second says July NFP is the beginning of a trend. If employment continues deteriorating while inflation cools, another hike becomes increasingly difficult to justify. We do not yet know which story is correct. Fortunately, markets are about to receive an enormous amount of evidence. The Question Traders Should Be Asking Over the next five weeks, traders should avoid simply asking whether each economic release is “bullish” or “bearish.” A better question is: What does this number change about September? Does it strengthen the inflation argument or the employment-risk argument? Does the move in Treasury yields confirm that interpretation? Does the dollar agree? Does gold agree? Are equities pricing lower rates or deteriorating growth? That is how individual economic releases become a coherent macro narrative. Right now, the Federal Reserve is not choosing between being hawkish and dovish. It is choosing between competing risks. Inflation remains too high, while employment momentum is becoming less convincing. July NFP did not solve that puzzle. It simply added another piece. By September 16, Kevin Warsh and the Federal Reserve will have to decide what picture those pieces are actually forming. Until then, keep the economic calendar nearby. The Fed certainly will.