June's softish jobs report provides no new fuel for a rate hike and in fact may give the Fed pause if there's no reversal this summer.
The 223,000 nonfarm payrolls added in June were slightly less than the 230,000 expected. But the unemployment rate fell to 5.3 percent from 5.5 percent because fewer people participated in the workforce or looked for jobs.
"Liftoff is still possible (for September), but the risks of a delay are rising quite rapidly," said Diane Swonk, chief economist at Mesirow Financial. "One month does not a trend make. We need a reversal now. We just hit another pot hole."
Stocks were mixed, with the S&P 500 slightly higher and lower. Treasury yields were lower but they were higher earlier in the day. The 10-year was at 2.37 percent after rising to as high as 2.45 percent ahead of the jobs report.
Economists have mostly been forecasting the first rate hike for September, based on expectations the economy will continue to improve through the summer.
"I think it doesn't really change the current take on the Fed. It's still a September or December liftoff hike," said Ian Lyngen, senior Treasury strategist at CRT Capital. "I think it was a reasonable report. If you factor in prior revisions, on the margin, it was slightly softer than anticipated. But it was not a significant enough deviation from expectations to warrant a shift in forecast."
But traders in futures markets Thursday cut back wagers on the first Fed rate increase for both September and December, and pushed bets out into 2016.
For instance, CME FedWatch, which tracks expectations in fed funds futures, shows that traders now see just a 49 percent chance of a December rate increase, down from 57 percent, according to Reuters.
RBS, which tracks a different measure, puts the odds of a September hike at just 23 percent, from a prior 30 percent.
"This was I would say a setback," said Jan Hatzius, chief economist at Goldman Sachs. The firm expects the first rise in December.
"It does not really change that significantly. It was a mixed report. Some aspects were more conducive to a rate hike," Hatzius said. He pointed to the drop in the unemployment rate, viewed as a trigger for the Fed as it edges closer to 5 percent, but noted the reasons for the decline were not positive.
Another disappointing detail in the report was that average hourly wages rose by just 2 percent in June over a year ago, down from 2.3 percent in May. There was also a downward revision that removed 60,000 jobs from April and May reports.
Economists say a necessary ingredient for a Fed rate hike is signs that wages will continue to rise, signalling eventual inflation.
Economists had expected a much more robust report, with signs of improving job prospects for teens and the long-term unemployed. After May's 0.3 percent monthly gain in average hourly wages, expectations were for more wage growth.
A surprising negative was the decline in the labor force participation rate of 0.3 percentage points to 62.6 percent in June.
Swonk said a bright spot was improved prospects for college grads and continued strength in business and professional hires—totaling 64,000 in June. But teens participated less in the workforce and an increase in low-paying jobs was likely behind the slower wage growth.
"You need two solid months of an increase in the participation rate. A deceleration in wages is not welcome. That's partly because of the composition. We had a lot of low-wage jobs. I still don't like it, and I don't think the Fed does either. It's a glass half full, leaving many without their thirst quenched," she said.
Markets have already been reducing the odds of a Fed rate hike this year, as Greece's troubles flared up. But economists see the improving U.S. economy as a factor to drive the central bank's decision.
"We are moving towards full employment and 2 percent inflation but at a slow pace," said Hatzius. "We think the next few months will bring more evidence of it but we're just not there yet."
He said if Greece's troubles spill over and impact financial conditions, that could delay the Fed.
"The baseline is that Greece is not going to have that much of a spillover on the rest of the (European) periphery but you can't be sure," he said.