Sept rate hike is close call, but the Fed likely moves, says Goldman’s Hatzius

Hatzius: 55% probability of September rate hike
Hatzius: 55% probability of September rate hike

The market's expectations for an interest rate increase this month fell after a disappointing August jobs report, but Goldman Sachs still thinks the Federal Reserve will pull the trigger, said Jan Hatzius, the firm's chief economist.

The Labor Department reported U.S. employers added just 151,000 jobs last month, compared with estimates for 180,000 new positions and after two months of gains in excess of 250,000 hires.

"It was a little below expectations, but for us, it's just enough to make it a little more likely than not that they do go in September," Hatzius told CNBC's "Squawk on the Street" on Friday.

While a hike at the Fed's September meeting will be a close call, a gain of 151,000 jobs is clearly above the central bank's estimate of what it takes to improve labor markets over time, he added. Hatzius further noted three- and six-month averages are well above the August data.

The market believes the probability of a rate increase this month is just 24 percent, according to the CME's FedWatch tool. Hatzius said those odds will need to rise in the lead-up to the Federal Open Market Committee meeting from Sept. 20-21.

Investors should watch for Fed commentary that the August report moved the labor market forward, which would be the sign policymakers view the data as good enough to hike, Hatzius said. On the other hand, if Fed speakers emphasize that the report was below expectations and recent inflation figures have weakened, that would signal the central bank will likely leave rates unchanged.

September still on the table for a hike: Pro
September still on the table for a hike: Pro

RBC Capital Markets' chief U.S. economist, Tom Porcelli, said the Fed should be fully engaged in a rate-hiking cycle at this point, but Friday's jobs report likely takes September off the table.

While 151,000 jobs is a "nice outcome" for an economy growing at roughly 2 percent, "the guts of the report were actually rather squishy," he said. Below the headline figure, wage growth slowed and a measure of workers who are discouraged or working part time for economic reasons remained stuck at 9.7 percent of the labor force.

"Really, the question is, is this report enough for this Fed to take the path in September?" he told "Squawk on the Street" on Friday.

"I think for this Fed it's probably not enough."

That said, the bulk of policymakers, including centrists like San Francisco Fed President John Williams, would view August's outcome as reasonable, Porcelli said. They understand job gains cannot keep pace with recent years given the maturity of the business cycle, he explained.