Traders work on the floor of the New York Stock Exchange during the afternoon of June 03, 2024 in New York City.
Michael M. Santiago | Getty Images
The surprising pace of job growth and rising wages in May has added to the conviction that the Fed will remain on hold through this summer and perhaps beyond.
The Bureau of Labor Statistics reported Friday that nonfarm payrolls increased by 272,000 during the month, well above Wall Street expectations of 190,000 and well above April's relatively weak gain of 165,000. In addition, average hourly earnings increased 4.1% over the past 12 months, which is more than expected.
Far from indicating that the labor market remains vibrant, the data at the very least adds to the narrative that the Fed does not have to rush into lowering interest rates.
With inflation rising above the central bank's 2% target, there is little evidence that higher interest rates are putting broad measures of economic growth at risk.
“I've been scratching my head in the parlor game about when the Fed will start cutting interest rates,” said Liz Ann Saunders, chief investment strategist at Charles Schwab. “I've been more in the camp that none of the components of the Fed's dual mandate indicate a need to start tapering, and a longer rally means nothing can happen this year.”
The Fed's “dual mandate” entails maintaining full employment and stable prices.
Even with the unemployment rate rising to 4% in May, the job market appears vibrant.
However, on the other side of the mandate, inflation remains well above the Fed's target. Most metrics see prices rising annually at a rate of about 3%, down significantly from their peak in mid-2022 but still high.
Lower expectations
Following the jobs numbers, futures traders reduced bets on interest rate cuts.
Pricing in federal funds futures indicated almost no chance of a cut at the Federal Open Market Committee meeting next week or on July 30-31. From there, prices point to about a 50-50 chance of a move in September, and just a 46% chance the Fed will follow through with a second cut before the end of the year, according to CME Group's FedWatch gauge Friday afternoon.
All of these odds are down sharply from Thursday's levels.
However, investors should not become too pessimistic, according to Rick Reeder, global fixed income chief investment officer for money management giant BlackRock. He pointed to weak demand for workers, as a report issued earlier this week showed, indicating that job opportunities continue to slow.
Furthermore, the Household Survey, which is used to calculate the unemployment rate, showed a decline in employment of 408,000 people and a continuing trend of part-time employment far outpacing full-time jobs.
“Thus, the Fed’s mandate of price stability and full employment is largely in balance,” Ryder wrote in a post-report analysis. “Under these circumstances, the Fed could lower the federal funds rate from very restrictive territory to merely restrictive positioning.”
He added: “We believe that the committee can still start cutting the interest rate by 25 basis points at its meeting in September, with the desire to make another cut this year, but inflation readings from here need to be supportive of that.”
Likewise, Citigroup, which has long been above Wall Street consensus as the company continues to expect significant rate cuts, said it now sees the Fed not acting until September but then continuing to cut rates from that point.
“The jobs report does not change our view that employment demand and the broader economy are slowing and that this will eventually prompt the Fed to respond with a series of cuts starting in the next few months,” Citigroup economist Andrew Hollenhorst wrote.
