Traders work on the floor of the New York Stock Exchange during afternoon trading on June 3, 2024 in New York City.
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The surprising pace of job growth and wage increases in May reinforced the belief that the Federal Reserve will remain on hold this summer and possibly beyond.
The Bureau of Labor Statistics reported Friday that nonfarm payrolls rose 272,000 for the month, well above the Wall Street consensus of 190,000 and well above April’s relatively muted gain of 165,000. In addition, average hourly wages increased by 4.1% in the last 12 months, more than expected.
Aside from signaling a still-buoyant job market, the data at least underscores the point that the Fed doesn’t need to rush to cut interest rates.
With inflation above the central bank’s 2 percent target, there is little evidence that higher interest rates threaten broad metrics of economic growth.
“I was a little puzzled by the parlor game of when the Fed will start cutting rates,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “I tend to think that none of the components of the Fed’s dual mandate indicate a need to start cutting rates, and that a prolonged hike means nothing could happen this year.”
The Fed’s “dual mandate” is to maintain both full employment and stable prices.
Even though the unemployment rate rose to 4% in May, the labor market appears to be dynamic.
However, on the other side of the mandate, inflation is still well above the Fed’s target. For most gauges, prices are rising about 3% annually, well below mid-2022 highs but still running hot.
Lowering expectations
Futures traders trimmed their rate cut bets on the back of the jobs numbers.
Fed funds futures prices suggested no further action at either the Federal Reserve’s FOMC meeting next week or on March 30-31. July a reduction is possible. From there, prices suggest about a 50-50 chance of a move in September and only about a 46% chance that the Fed will make a second rate cut before the end of the year, according to CME Group’s FedWatch gauge on Friday afternoon.
All of these probabilities declined significantly from Thursday’s levels.
But investors shouldn’t become too pessimistic, says Rick Rieder, chief investment officer at global bond giant BlackRock. He cited subdued demand for workers, according to a report earlier this week that suggested job vacancies continue to decline.
In addition, the household survey used to calculate the unemployment rate found a decline in employment of 408,000 people and a continued trend of part-time employment significantly exceeding full-time employment.
“And so the Federal Reserve’s mandate of price stability and full employment largely comes into balance,” Rieder wrote in an analysis following the report. “Under these conditions, the Fed can lower the key interest rate from a very restrictive range to merely restrictive positioning.”
“We believe the committee can still start cutting the policy rate by 25 basis points at its September meeting, with a desire to implement another cut this year, but current inflation readings must support this,” he added.
Similarly, Citigroup, long above Wall Street consensus as the company continued to expect aggressive rate cuts, said it now expects the Fed to take action only in September, but will then continue to raise interest rates from then on lowers.
“The jobs report does not change our view that demand for jobs and the overall economy is slowing and that this will ultimately lead to the Fed responding with a series of cuts over the next few months,” wrote Citigroup economist Andrew Hollenhorst.
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2024-06-07 21:40:11
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