Hiring remained robust in July, unemployment fell slightly, wages and labor participation continued to stagnate, and the likely result will keep the Federal Reserve policy of slowly ending the state of monetary emergency that has existed for almost a decade firmly in place.

The Labor Department reported 205,000 new positions created last month, following June’s revised gain of 194,000 and the unemployment rate fell one tenth to 4.3 percent.  Economists had expected 180,000 jobs and an unchanged unemployment rate.  A year ago the rate stood at 4.9 percent. May and June payrolls were revised for a total gain of 2,000.  

The dollar rose against it major trading partners after the report at 8:30 am.,initially gaining more than a figure versus the euro, the yen and the pound. 

The labor force participation rate climbed to 62.9 percent from 62.8 percent though it remains near a generational low. Average hourly earnings rose 0.3 percent, after the June increase of 0.2 percent and annual wages were 2.5 percent ahead of last year, with 2.4 percent having been predicted. 

Payrolls and the steady if not improving wages should help the Fed keep to its two-year old policy of gradually normalizing interest rate on track with the next hike anticipated in December. The central bank is also planning to initiate a reduction of its more than $4 trillion balance sheet.

One caveat to both policies is the recent unexpected drop in inflation.

Consumer prices pressures have waned over the past year. In June the core personal consumption expenditure price index, the Fed’s preferred inflation measure rose just 1.5 percent annually down from 1.9 percent in February.  The core rate leaves out more volatile food and energy costs.

The Fed maintains a 2 percent inflation target and officials have often said they want to see sustained price increase before they commit to more rate increases. Though Fed officials have said that the current decline is transitory, the bank has long predicted that inflation would return, over time to its 2 percent target. That has yet to happen.

But declining inflation did not prevent the open market committee, the rate setting body of the central bank, from a 0.25 percent increase in June, the second of the year. 

There will be one more employment report before the September 19th-20th meeting. With the Fed normalization policy two years old and the economy on a steady footing, it would likely take an unexpected crisis to deter the Fed's plans. The governors are expected to announce their policy for reducing the balance sheet at next month’s meeting. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Zerohedge/BLS