Fed Speaks Out Intensively After Labor Market Cools. Another Official Says Inflation Will Cool Following Warsh’s Speech

TradingKey - On July 2, Eastern Time, following two consecutive unexpectedly weak labor market reports, another Federal Reserve official stated that the current restrictive monetary policy stance will gradually push inflation down.

U.S. non-farm payrolls released today increased by 57,000 in June, significantly below the market expectation of 113,000, with the April and May non-farm payroll figures revised down by a combined 74,000. Yesterday's ADP report showed that private-sector employment increased by 98,000 in June, also below the market expectation of 118,000, marking the smallest gain since March.

The two below-expectation employment reports have exacerbated market concerns about a cooling labor market.

Following the release of the non-farm payrolls report, San Francisco Fed President Mary Daly pointed out at a Bank of Spain event that the rise in inflation this spring was primarily driven by the dual impact of tariff hikes and the U.S.-Iran conflict pushing up oil prices. With the ceasefire taking effect and oil prices retreating, there is hope that inflationary pressures have begun to ease.

However, she also emphasized that the economic outlook remains uncertain, and the Fed will adopt different responses under various scenarios. If inflation proves more persistent than expected, the Fed will make aggressive decisions based on the situation and retain the option of raising interest rates.

Sharing the same view as Daly is Fed Governor Warsh. In his public remarks yesterday, he mentioned that both inflation expectations and inflation risks have declined in recent weeks, but also reiterated that he would not provide explicit "forward guidance" for future interest rate policy.

Currently, with shipping resuming through the Strait of Hormuz, crude oil supply disruptions have eased, and WTI crude has fallen to around $70 per barrel, significantly reducing its upward pressure on global inflation. However, Fed Governor Warsh's monetary policy stance still periodically impacts investor expectations of U.S. monetary policy.

[Source: CME]

Currently, the market estimates the probability of a Fed rate hike at its meeting later this month to be around 20%, down from 33% before the data was released. By March 2027, the Fed is expected to raise rates fewer than two times, with each hike not exceeding 25 basis points.

Meanwhile, U.S. Treasury yields also fell in tandem, with the 2-year U.S. Treasury yield dropping from around 4.191% to 4.108%, and the 10-year yield declining from around 4.505% to 4.461%.

Taken together, this is not a simple rebound in risk appetite, but rather a market recalibration of the Fed's near-term policy path.