July's slower gain of 209,000 nonfarm payrolls shows the economy is chugging along, and the labor market is improving, but it is also not strong enough to push the Fed to hike rates earlier than expected.
Job creation was slightly below the 233,000 expected, and the unemployment rate rose to 6.2 percent as more workers attempted to join the workforce. The rate had been 6.1 percent and was expected to fall to 6 percent.
The big fear in markets has been that stronger data and signs of inflation mean the Fed will raise rates sooner than the second half of next year, the time frame expected by many economists. Stock futures immediately erased steep losses, the dollar tumbled and bond yields fell when the jobs report was released.
Read MoreJob creation misses expectations, unemployment rate rises
"If people are really worried about the Fed being active sooner rather than later, on all fronts this is good. Wages are pretty tepid, up 2 percent on average hourly earnings year over year.That's a decent gain but not an acceleration. That will help ease these fears," said John Canally, investment strategist and economist at LPL Financial.
The trend in job growth remains encouraging, with job creation at more than 200,000 a month for the past six months. June's payrolls were revised higher to 298,000 from 288,000
Read MoreWhat do investors fear most? The Fed's bubble
The jump in the employment cost index Thursday triggered concerns that the market would move ahead of the Fed's interest rate hikes, expected by economists to start in the middle or third quarter of next year.
Second-quarter GDP growth of 4 percent also spooked markets this week, particularly as it showed the biggest uptick in inflation since the recovery began.
Canally said he expects that the economy is now growing at a 3 percent rate, and it is getting past the bounce back numbers that came after the first quarter's contraction.
"The prior two months (payrolls) were revised higher, and the trend that was in place before the winter weather was restored. The last three months were a little bit hot. Now, we're reverting back, 225,000 to 250,000 is a pretty decent clip," he said.
Important to the Fed is the number of long-term unemployed, which was unchanged at 3.2 million. That group accounts for 32.9 percent of the unemploymend, and that number has dropped by 1.1 million over the past year.
"We're over 200,000—that's consistent with 3 percent GDP growth which is solid growth," said Mark Zandi, chief economist at Moody's Analytics. "We're on track to create just under 3 million jobs this year. The labor force participation rate has been stable for the past nine months. It looks like it bottomed out."
The participation rate—workers in or looking to be in the workforce—rose slightly to 62.9 percent from 62.8, a level it had been at for three months.
Zandi said the unemployment rate increase was not a concern since it reflected more workers attempting to join the workforce. "Given how sharply unemploymend has declined over the last year and a half, I don't think this means anything," he said of the move higher to 6.2 percent.
The market was focused on the possibility that the number would hit 6 percent or even less since at one point the Fed had targeted that level as a threshold to consider rate hikes. But it has since altered that view and emphasizes that it is not a target.
The Fed ends tapering of its bond buying program in October, and the markets have been rife with speculation about when the central bank would start to raise the fed funds rate.
Bond yields have been edging up at the short end of the curve in anticipation of the Fed's rate hikes next year. But the market is split on timing, with some traders betting the consensus view of midyear or later is wrong and that the economic data will force the Fed to move sooner.
—By CNBC's Patti Domm