The consensus on Wall Street calls for the central bank to raise rates twice more this year, in September and December.
The unemployment rate ticked down to 3.9 percent from 4 percent.
Economists had forecast that the number of jobs created would be nearly 190,000 for the month.
And analysts said the latest data could understate the strength of the labor market.
Despite many businesses' trouble finding qualified workers, they are still hiring and looking outside traditional pools for talent.
Expectations were for the economy to add 193,000 jobs with the unemployment rate falling to 3.9%.
But a big drag came from sporting goods, hobby, book, and music retailers, which lost 31,800 jobs on net.
Average hourly earnings increased by 7 cents, or 0.3 percent, to $27.05. But many potential workers are still on the sidelines, and Congress has an opening to help.
Nonbank mortgage lenders and brokers employed 345,400 people during the month, according to the Bureau of Labor Statistics.
Friday's report also included a revision to prior jobs reports, which now suggests the economy added 248,000 jobs in June, up from an initial report showing 213,000 new jobs were added to the economy. The July gain is the 93rd consecutive month of job growth.
The Trump administration cheered the jobs numbers on Friday as a sign its economic policies are continuing to boost growth and hiring.
A company representative, left, speaks with a job seeker during a United Career Fairs sales and management hiring event in Oak Brook, Ill., on July 17. In the service sector, hiring of 118,000 was the lowest since December, partly reflecting the cuts at Toys "R" Us. Americans found the most jobs in the sectors of professional and business services, manufacturing, and in health care and social assistance.
The drop in government payrolls was concentrated in local governments, which shed 20,000 jobs.
Although the labor force participation rate was unchanged at 62.9%, it increased for the prime working-age cohort (25-54 years). It's been relatively flat for the past few years, as people return from the sidelines to find work while baby boomers retire and exert downward pressure on the measure. The employment to population (EP) ratio for that group also rose to 79.5%, the highest it has been since May 2008.
The gain was the lowest since March, though it still dropped the unemployment rate to 3.9% from 4%, or roughly the lowest in half a century.