US Payrolls Turn Negative, Sparking Debate: BlackRock Fixed Income CIO Says AI Is Rendering Jobs Data Obsolete, Rate Hikes "No Longer Make Sense" – finance.biggo.com

The unexpected negative turn in US July nonfarm payrolls has ignited a fierce debate about the true state of the labor market and the trajectory of monetary policy. While the mainstream view interprets this as a clear signal of economic slowdown, BlackRock, the world’s largest asset manager, offers a starkly different reading: the employment weakness is not a collapse in demand, but rather an AI-driven productivity revolution that is fundamentally rewriting the operating logic of the labor market.
At the center of this debate is Rick Rieder, BlackRock’s Global Fixed Income Chief Investment Officer, who was once a leading candidate alongside Kevin Warsh to chair the Federal Reserve. Rieder argues bluntly that under the combined forces of AI technology penetration, corporate pursuit of extreme efficiency, and a significant drop in immigration, the signaling value of nonfarm payrolls as an economic barometer is being systematically eroded. He went further to question the effectiveness of interest rate tools, stating that “raising rates doesn’t make much sense nowadays,” and advocating for a shift toward fiscal measures such as deregulation to combat inflation.
Payrolls Miss: Structural Fractures Beneath the Data
The employment report released by the US Bureau of Labor Statistics on Friday showed that nonfarm payrolls decreased by 23,000 in July, far below market expectations. June’s figure was also revised sharply downward, from the originally reported gain of 57,000 to just 20,000, with the combined May and June totals revised down by 103,000 jobs from initial estimates.
On the surface, the unemployment rate fell from 4.2% in June to 4.1%, but this was not due to improving employment. The labor force participation rate dropped to 61.4%, a near five-and-a-half-year low, as another 264,000 people exited the workforce. Excluding the COVID-19 pandemic period, the current participation rate is the lowest since mid-1976.
By sector, July employment was dragged down by a loss of 50,000 local government education jobs. The retail sector shed 19,000 positions, and financial industry employment continued to slide, losing 14,000 jobs. Since peaking in May 2025, the financial sector has cumulatively lost 121,000 jobs. Wages were nearly stagnant for the month, with average hourly earnings growth slowing to 3.2% year-over-year, the lowest level since May 2021.
Boris Schlossberg, macro strategist at BK Asset Management, noted that the job market is showing a stark divergence: layoffs are extremely low, but new hiring is weak, and wages are not strengthening significantly enough to generate a wage-inflation spiral. Multiple constraints are limiting hiring, including Trump-era tariffs, the Iran conflict pushing up oil prices, AI technology iteration, and tighter immigration policies.
BlackRock’s Alternative Reading: AI Is Rendering Jobs Data Obsolete
Just as the market was dialing back rate hike expectations following the negative payrolls print, Rieder proposed a disruptive analytical framework. He stated explicitly: “We can no longer simply equate employment weakness with economic weakness.”
He attributed the July payroll decline to three structural factors: the deep application of AI in the workplace, the corporate pursuit of extreme operational efficiency, and the contraction in the available labor force due to a significant drop in immigration. In his logic, the decline in employment numbers precisely reflects that “American companies are learning how to expand output without increasing headcount.”
Both macro and micro data support this assessment. The improvement in US labor productivity is not merely theoretical. Research from 22V Research shows that approximately 25 S&P 500 constituent companies have quantified AI’s impact on their profits, with an average contribution of 180 basis points to profit margin growth.
US waste management company WM disclosed that its “smart truck” platform generates over $300 million in annual EBITDA through service upgrades, route optimization, and lower operating costs. Insurance brokerage and consulting firm Willis Towers Watson stated it expects to achieve $400 million in cost savings through process automation. This proves that AI-driven margin improvement is not exclusive to technology companies.
Based on this, Rieder directly questioned the effectiveness of rate hikes. He argues that if inflationary pressures stem more from structural factors such as AI reshaping the production function and immigration policy altering labor supply, then traditional interest rate tools—whose transmission mechanism relies on suppressing aggregate demand—are experiencing diminishing marginal utility in addressing such shocks. He contends that fiscal measures such as deregulation, reforming housing permit systems, and student debt relief are more helpful in alleviating inflation than tightening monetary policy.
At the asset allocation level, Rieder’s macro judgments have translated into clear positioning. He revealed that his fund currently favors European fixed-income assets, emerging market assets, and securitized assets, while stating bluntly that US investment-grade corporate bonds “have no appeal at all,” citing significant new supply pressure facing the market.
The Fed’s Dilemma: Balancing Inflation and Employment
This report arrives at a time when divisions within the Federal Reserve over the rate path have intensified. Two weeks ago, the Federal Open Market Committee (FOMC) voted 9-3 to hold the benchmark rate steady. In recent days, several Fed officials have signaled that if inflation does not moderate, a rate hike could come as early as September.
Following the jobs report, the market quickly adjusted its rate hike bets. The CME FedWatch Tool shows the probability of a September hike falling back to 44%, with an October hike probability at 58.3%. Next week’s July inflation data will further define the direction of near-term monetary policy speculation.
Bloomberg Economics noted in its latest weekly outlook report that while the July jobs report dealt a blow to market bets on a September hike, the option of raising rates has not been completely taken off the table. Currently, a clear divergence persists between internal Fed views and market opinion: one camp believes the central bank needs to reaffirm its inflation-fighting resolve through a rate hike, especially given Chair Warsh’s need to maintain anti-inflation credibility; the other camp believes price pressures are easing and that the Fed is correct to maintain its current policy path.
Bloomberg Economics expects that the overall July CPI, due Wednesday next week, will rise 2.4% year-over-year, with further moderation to 2.2%-2.3% in the following two months. Historically, this typically corresponds with core CPI slowing to 2%, which would be the lowest increase since March 2021. The team believes this further supports the case for the Fed to stand pat in September.
However, the divergence among inflation gauges complicates the picture. Currently, core CPI is expected to continue cooling, but core PCE inflation remains above 3%. Bloomberg views such a pronounced deviation between core CPI and core PCE as anomalous and not something to be simply ignored. This, in fact, supports the view previously articulated by Warsh that the Fed needs to observe a broader set of economic indicators and cannot rely on a single inflation metric to judge policy direction.
Market Divergence: From Hikes to Cuts, Institutions Are Split
Wall Street forecasts for the Fed’s year-end terminal rate show significant divergence.
Brian Jacobsen, Chief Economist at Annex Wealth Management, believes the Fed must proceed with caution. He noted: “Rate hikes hit manufacturing first, and harder than services. Does strangling a nascent employment recovery in manufacturing really help fight inflation?” He judges that, faced with structural inflation issues, Warsh will most likely prioritize balance sheet reduction over rate hikes. If a majority of committee members insist on hiking, the Fed Chair himself could cast a dissenting vote in September.
Stephen Stanley, Chief US Economist at Santander Capital Markets, cautioned the market against over-interpretation, stating: “This is now the third consecutive summer of unexpectedly weak employment data. Policymakers overall still judge the labor market to be broadly stable.”
Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, believes the weak July payrolls did reduce pressure on the Fed to hike in September, but next week’s inflation data will remain the decisive factor. “If inflation data comes in hotter than expected, even a cooling labor market won’t be enough to quiet the calls for a hike within the Fed.”
Aditya Bhave, US Economist at Bank of America Securities, maintained a hawkish stance: “Taken together, the July employment report leans dovish overall. But we maintain our existing call: the Fed will hike a cumulative 75 basis points this year, starting as early as September; the Fed is most likely to focus more on inflation than the job market.”
In contrast, Citi analysts offered the most dovish view. They noted: “A weakening labor market, combined with subsequent cooling inflation, means the Fed once again needs to weigh upside inflation risks against downside employment risks. We see a very low probability of further hikes and maintain our call that the Fed’s next move is a rate cut, with our base case being a cut delivered in October.”
Following the July nonfarm payrolls report, the core question for the Fed’s September meeting has shifted from “Is a rate hike needed?” to “Is a rate hike still necessary?” A cooling labor market and slowing wage growth provide more reasons to hold rates steady; but core PCE still above 3%, along with some officials’ concerns about inflation credibility, means the possibility of a hike has not completely vanished.
As Bloomberg Economics points out, if future CPI continues to decline, the case for the Fed maintaining its current policy path will strengthen further; but if inflation rebounds, the hawkish camp could still regain the initiative. Ahead of the September FOMC meeting, market focus will shift from employment to inflation: whether the July CPI can prove that US price pressures are sustainably easing will be the key evidence determining the Fed’s next move.
And the thesis put forward by BlackRock Fixed Income CIO Rieder offers another possibility for this debate: when AI begins to systematically alter the signaling meaning of employment data, perhaps both traditional macro analytical frameworks and monetary policy tools have reached a moment that demands re-examination.
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