Fed seen waiting to cut rates as job growth picks up
A US job market scorecard that exceeded all forecasts has undercut confidence over when, or even if, the Federal Reserve will begin easing policy this year, putting the focus for the policy outlook on next week’s Fed meeting and Fed chair Jerome Powell’s own guidance.
The latest monthly Labor Department report did break the economy’s two-year string of below-4 per cent unemployment, a run not seen since the 1960s.
But it hardly seemed to matter:
Hiring across the economy was broad, and the 272,000 jobs added in May topped even the highest-guessing economist in a Reuters poll. Wage growth accelerated.
All that flew in the face of growing expectations that the labour market had begun to cool, which would help the Fed reach its 2 per cent inflation goal faster and pave the way for a reduction in borrowing costs before summer’s end.
After the report, traders slashed bets on an initial Fed interest-rate cut by September, taking the probability down to just a bit stronger than a toss of the coin, from about a 70 per cent chance seen previously.
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A second rate cut by December is also now seen as only barely more likely than not. US central bankers meeting next Tuesday (Jun 11) and Wednesday are still widely expected to leave the policy rate in the current 5.25 to 5.5 per cent range, where they have kept it since last July.
Most analysts have also predicted that Fed officials’ quarterly projections published at the end of next week’s meeting will reflect expectations for fewer rate cuts this year than the three that policymakers had penciled in in March.
The jobs data raises new questions over that outlook.Fed
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“We had been anticipating the start of rate cuts in September, totaling 50 basis points of cuts this year, but the persevering strong employment gains raises the likelihood of later rate cuts,” wrote Nationwide chief economist Kathy Bostjancic.
US central bankers have said they do not plan to cut rates until they are more confident that inflation is declining towards their 2 per cent goal. Friday’s data suggests pressures are pushing prices the other way, with average hourly earnings up 4.1 per cent in May from a year earlier, after an upwardly revised 4 per cent rise in April.
Still, Bostjancic and other analysts pointed to weaknesses in part of Friday’s report that cloud the picture. One of the report’s two surveys showed a massive 408,000 drop in employment in May, which helped push the US unemployment rate to 4 per cent, from 3.9 per cent in April. The rate had been below 4 per cent for more than two years.
On Wednesday the Labor Department will publish the consumer price index data for May, giving policymakers fresh insight on whether inflation data is breaking lower after disappointingly high readings in the first several months of the year.
“The ambiguity on the May labour market front will place even more attention on next week’s CPI inflation data and how Jay Powell and the FOMC (Federal Open Market Committee) are factoring in the latest numbers into their rate-cut expectations,” wrote BMO Capital Markets economist Scott Anderson. REUTERS
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