A weaker-than-expected jobs report for July is likely to strengthen the case for those who support holding interest rates steady and could renew Federal Reserve policymakers' focus on the strength of the job market if payrolls continue to soften.

But short of a weakening trend, officials are still likely to keep their focus on inflation.

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Payrolls for the month of July contracted by 23,000, compared with expectations for a gain of 80,000. The number of jobs initially reported in May and June was revised down by a combined 103,000.

The unemployment rate ticked down to 4.1% from 4.2% in June, as labor force participation fell. Since January, the labor force participation rate has declined by 0.7%.

Job declines were led by local government education, which dropped by 50,000; retail, which shed nearly 20,000 jobs; and the financial sector, which lost 14,000 jobs. Healthcare added 22,000 jobs.

"Although the hiring weakness in the July employment report has not been reflected in the broader set of labor market indicators, it is still likely to revive concerns among Fed officials about the health of the labour market and make them less inclined to commit to near-term tightening," Capital Economics senior economist Thomas Ryan said.

"Overall, it's going to take a meaningful upside surprise in the price data next week for the Fed to hike interest rates as soon as September," he added.

Federal Reserve Chairman Kevin Warsh speaks at a news conference at the Federal Reserve in Washington on July 29, 2026. (AP Photo/Mark Schiefelbein) · AP Photo/Mark Schiefelbein

Richmond Fed president Tom Barkin on Friday called the jobs report "very consistent with how I've been seeing the labor market, which is, it's not loose, it's not tight, it's sort of been a weak balance."

Barkin said during a National Association for Business Economics webinar that when he talks to employers, they're still not hiring, though they're not firing either. He stressed that the workforce isn't growing, given the combination of lower immigration, changing demographics, and people aging out of the workforce.

"We're in a zero-ish workforce growth environment, and we're in a zero to modest to positive jobs growth environment," said Barkin. "That's been pretty consistent in my mind over the last year, year and a half. "

Earlier this week, Fed governor Lisa Cook, who favored holding rates steady at the Fed's July meeting, said if she does not see signs of inflation coming down soon, she is prepared to act. She added the caveat that she would consider how raising rates would affect job market stability.

"I would support an increase if it becomes necessary to bring inflation down. It may not," she said. "Some disinflationary forces are already in play, which could push inflation toward our target without a rate increase."