The Labor Department reported early this morning that the unemployment rate hit a 4-year high of 5.7 percent in July and non-farm payrolls declined 51,000, and given other ills in the economy, market participants don’t expect the Federal Reserve to raise interest rates at its policy meeting next week on August 5. CME Group Fed funds futures show odds of about 93% the Fed will keep its key short-term lending rate steady at 2%, but are pricing in odds of about 58% that the Fed will raise rates at its October meeting.

However, in a Fed watch webinar hosted by CME Group Thursday, MF Global Senior Vice President of Hedge Fund Sales John Brady said expectations of an increase later in the year are tied to high headline inflation numbers, and he felt it it more likely the Fed will continue to sit tight given what could be even more economic deterioration, and eventually resulting deflation, ahead.

“Right now, with headline inflation running at 5 percent, some could argue perhaps interest rates at 2 percent are much too weak…A simple look at the Taylor Rule suggests interest rate policy would be closer to 3.65 percent. Fed policy makers may be anticipating, in terms of keeping a lower interest rate policy, a tremendous slowdown in the economy in the coming 18-24 months…The idea is that Fed policymakers have sacrificed some of their short-term inflation credibility in order to maintain some strength in the domestic economy, but also to keep the banking sector on its feet,” Brady said.