Surprisingly strong hiring across the U.S. economy has put pressure on the central bank to raise rates later this summer if the central bank does not raise rates at its upcoming policy meeting this month.
Data on Friday showed another strong increase in employment in May, with nearly 340,000 jobs added across a range of industries. The outcome underscores the strength of the U.S. labor market that remains strong and raises the prospect that the central bank has yet to rein in demand enough to keep inflation in check.
The jobs report came as Fed officials debated what to do at their next policy meeting, with several senior officials advocating the central bank forgo raising interest rates while leaving the door open for further tightening later.
That, they argue, will give the Fed more time to assess the impact of rate hikes so far, as well as the impact of the banking turmoil caused by the collapse of Silicon Valley Bank and Signature Bank in March. Gov. Philip Jefferson, who has been named the next vice chair, is the latest senior official to make that argument this week.
Others, including a minority of voting members of the Federal Open Market Committee, appeared more determined to see the need to raise borrowing costs again, citing disappointing progress in removing price pressures.
“They’re entering a policy phase where we can’t assume action at every meeting, but they’re still data-sensitive, so this policy decision is a close call,” said Brian Sack, who previously headed the committee. explain. Market Department of the Federal Reserve Bank of New York.
Sack said the chances of a rate hike had risen slightly when officials next meet, and that a July hike “would play a big part” if they opted not to raise rates this month.
Since March 2022, the Fed has raised its benchmark interest rate by more than 5 percentage points. Another 25 basis point hike would increase the target range to 5.25-5.5%.
Giving the Fed some cover to take a more cautious approach and forego a June rate hike are signs that the labor market, while still strong, is starting to lose some momentum. While hiring was strong — the upward revision also meant job growth over the past two months was 93,000 more than initially reported — the unemployment rate rose 0.3 percentage point to 3.7%. This is the highest level since October 2022.
Wage growth also cooled, inching down to a 4.3% annual rate after rising 0.3% a month. Meanwhile, the average number of hours worked by all employees fell, suggesting companies may start cutting spending.
“If the FOMC wants to see signs that the labor market is easing, it needs to dig deeper, but I think the signs are there,” said Blerina Uruci, chief U.S. economist at T Rowe Price.
“I would expect the Fed to change the pace of rate hikes now to something like every other meeting, which would allow it to maintain a tightening bias, noting that a lot of tightening has already been done and we are still absorbing the impact of the stress in the banking sector. “
She now sees a further increase in the chances of a rate hike in July. Economists at Morgan Stanley also said on Friday that the jobs report “increased” the risk of an increase in two months after a decline in June. According to the fed funds futures market, traders have been slightly in favor of the central bank not taking action in June, but raising interest rates by 25 basis points in July.
Many economists expect the Fed to signal its inclination to tighten policy further by raising its median estimate for the federal funds rate this year by at least 25 basis points in a so-called “dot plot” that tracks officials Personal forecasts of economic growth. The way forward for policy.
In March, when estimates were last assembled, most officials thought the federal funds rate would peak between 5% and 5.25%, where it is now. At the time, Fed Chairman Jay Powell said a spate of bank failures ahead of the meeting had dampened expectations of how much more the central bank needed to do. Still, seven policymakers estimated that policy rates would need to exceed that level at the time.
“What makes the current policy situation even more difficult is that the Fed wants to be responsive to economic momentum, but it may be concerned that bank credit will become increasingly detrimental to the economy over time,” Sack said.