May’s employment report exceeded expectations, showcasing a robust job market and a notable increase in wages. Nonfarm payrolls surged by 272,000, surpassing the projected figure of 190,000 and outstripping April’s gain. Additionally, average hourly earnings saw a 4.1% rise over the past year, a figure higher than anticipated. These statistics bolster the belief that the Federal Reserve will maintain its current interest rate stance throughout the summer and potentially beyond.
The data suggests that the Fed isn’t under pressure to swiftly lower interest rates despite inflation hovering above its 2% target. Liz Ann Sonders, chief investment strategist at Charles Schwab, notes the absence of indicators necessitating rate cuts based on the Fed’s dual mandate of full employment and stable prices. Although the unemployment rate ticked up to 4% in May, the labor market remains vigorous.
However, inflation remains a concern, persisting well beyond the Fed’s target rate. While inflation has moderated since its mid-2022 peaks, it still runs considerably high, hovering around 3%. In response to the employment figures, futures traders reduced expectations for rate cuts. Fed funds futures indicated minimal likelihood of rate reduction in upcoming FOMC meetings, with probabilities sharply down from previous estimates.
Rick Rieder, chief investment officer of global fixed income at BlackRock, emphasizes that softening demand for workers, reflected in decelerating job openings, suggests a balanced approach for the Fed regarding its dual mandate. Despite the encouraging employment report, concerns persist, with the household survey indicating a decline in employment and part-time positions outpacing full-time roles. Rieder suggests the Fed may consider reducing the Fed Funds rate gradually.
Citigroup, previously anticipating aggressive rate cuts, now forecasts the Fed delaying action until September but subsequently embarking on a series of rate reductions. Economist Andrew Hollenhorst maintains that despite the strong job report, signs of economic slowdown will likely prompt the Fed to initiate rate cuts in the coming months.
