A blowout U.S. jobs report for July means the Federal Reserve will need to keep going with the most aggressive rate hikes in decades to curb demand and inflation. 

U.S. employers added 528,000 jobs last month, more than all estimates, the unemployment rate fell to a five-decade low of 3.5%, and wage growth accelerated, the Labor Department said.   

The data add impetus for the Federal Open Market Committee to raise interest rates by 75 basis points when it meets in September, matching the moves it made in June and July as it works to cool an inflation rate that’s running at a 40-year high. 

The labor market is “still sizzling” and that can feed into inflation, said Diane Swonk, the chief economist at KPMG LLP. “This argues for another 75 basis point hike by the Fed. The focus is on unemployment, the cost of churn and the staffing shortages due to increase in people out sick due to Covid.”  

At a press conference last week, Fed Chair Jerome Powell gave no specific forward guidance and said future rate increases would be depend on data and would be decided meeting by meeting. Friday’s jobs data are the first key print gauging the health of the labor market; the next major piece in the puzzle will be the July consumer-price inflation readout on Aug. 10.  

Ultimately, the inflation data will decide the September move, which could also be affected by falling commodity prices and supply-chain improvements, said Julia Coronado, co-founder of MacroPolicy Perspectives LLC and a former Fed economist.

All else equal, the jobs data “would lean in favor of either a 75 basis-point hike or a longer hiking cycle, because we are not seeing moderating job growth,” she said.

Short-dated U.S. interest rates jumped after the payrolls report, with swaps indicating that an increase of 75 basis points to the Fed’s key rate is now seen as a more likely outcome than 50 basis points at the central bank’s September meeting. 

The upper bound of the Fed’s benchmark is now at 2.5%. Policy makers will have to get the target rate to the region of 4% and hold it there for some time to quell inflation and price expectations, said Randall Kroszner, a former governor at the central bank. 

“You’ve really got to make sure that inflation and inflation expectations have come down and are out of the system,” Kroszner, an economics professor at the University of Chicago Booth School of Business, said on Bloomberg Television. After the jobs report, he said that a 75 basis-point increase “will be on the table for the next meeting.”

This article was provided by Bloomberg News.