Hopes for rate cut ease after strong jobs report | Wilnesh News

May’s surprising job growth and rising wages reinforce the belief that the Fed will remain on hold this summer and possibly beyond.

The U.S. Bureau of Labor Statistics reported on Friday that nonfarm payroll employment increased by 272,000 this month, well above Wall Street expectations of 190,000 and well above April’s relatively modest 165,000. In addition, average hourly earnings grew 4.1% over the past 12 months, exceeding expectations.

In addition to showing that the labor market remains vibrant, these data at least provide further evidence that the Fed does not need to rush to lower interest rates. With inflation above the central bank’s 2% target, there is little evidence that rising interest rates will jeopardize broad indicators of economic growth.

“I’ve been a little confused as to when the Fed will start cutting rates,” said Liz Ann Sanders, chief investment strategist at Charles Schwab. “I’m more inclined to think that none of the components of the Fed’s dual mandate signal the need to start cutting rates. , and interest rates continuing to rise mean nothing is going to happen this year.”

The Fed’s “dual mission” includes maintaining full employment and stabilizing prices.

Although the unemployment rate rose to 4% in May, the labor market still appears to be vibrant. On the other hand, however, inflation remains well above the Fed’s target. Prices for most indicators are up about 3% annually, down sharply from their mid-2022 peak but still in the red.

Fed funds futures pricing shows little chance of a downward adjustment next week or at the Federal Open Market Committee meeting on July 30-31. Since then, pricing suggests the likelihood of action in September is about 54%, and the likelihood of a second rate cut by the end of the year is just over 50%, according to the Fed. CME Group’s Fed Watch Measured around noon on Friday.

All of these odds are significantly lower than Thursday’s levels.

However, Rick Reed, chief investment officer of global fixed income at money management giant BlackRock, said investors should not be too pessimistic. He pointed to a report earlier this week showing weak demand for workers, suggesting job openings are continuing to shrink.

In addition, the household survey used to calculate the unemployment rate showed a decline of 408,000 people in employment, with a continued trend of part-time employment far exceeding that of full-time employment.

“Thus, the Fed’s mission of maintaining price stability and full employment is largely balanced,” Reid wrote in a post-report analysis. “With these conditions in place, the Fed can lower the federal funds rate from a very tight range to a merely restrictive position.”

“We believe the committee can still start cutting the policy rate by 25 basis points at the September meeting and hope to cut rates again this year, but current inflation data will need to support this,” he added.

Likewise, Citigroup, which has long topped Wall Street consensus, said it currently does not expect the Fed to take action until September but will continue to cut rates from then on.

Citigroup economist Andrew Hollenhorst wrote: “The jobs report does not change our view that hiring demand and the overall economy are slowing, which will ultimately prompt the Fed to A series of interest rate cuts were introduced in March.