Why Do Economists Think Jobs Report Could Delay Fed Rate Cuts?

(RTTNews) - The strong set of employment figures released on Friday have sent market expectations for Fed rate cuts lower as the data pointed to a strong labor market and the increase in wages could add to the stickiness of inflation.

Non-farm payroll employment surged by 272,000 jobs in May, data from the Labor Department showed Friday. Economists had forecast employment growth of about 185,000 jobs. Average hourly earnings grew 0.4 percent from the previous month, which was faster than 0.3 percent economists had expected.

Meanwhile, the household survey showed that the unemployment rate climbed to 4 percent for the first time since January 2022 from 3.9 percent in April.

Read more: U.S. Job Growth Far Exceeds Estimates In May But Unemployment Rate Ticks Higher Here is what economists think - Nationwide: Better than expected payroll growth could help keep inflation more buoyant and delay Fed rate cuts to later this year or into next year, economist Kathy Bostjancic said.

"We had been anticipating the start of rate cuts in September, totaling 50bps of cuts this year but the persevering strong employment gains raises the likelihood of later rate cuts."

Commerzbank: "The data do not suggest that the Fed will cut interest rates in the near future," economist Berd Weidensteiner said.

The Fed is set to adopt a wait and see approach as the labor market continues to perform too well to provide any real relief from inflationary pressure, the economist said. That said, the strong job growth reduces the risk of an economic slowdown, the economist added. "Our forecast that the Fed will not cut key interest rates for the first time until December is confirmed," Weidensteiner said. Capital Economics: The bigger-than-expected gain in non-farm payrolls is likely to soothe fears about the economy, while the increase in average earnings would prompt the Fed to remain focused on the upside risks to inflation, said economist Paul Ashworth.

"The latest alternative QCEW employment data, used to benchmark payrolls, do suggest that payrolls need to be revised down significantly for the second half of this year, so possibly some of the recent out-performance will prove to be illusory too," Ashworth said.

"That said, we expect post-revisions to see slower employment growth, rather than an outright decline consistent with a recession beginning last fall."

Falling job openings and voluntary quits point to a further moderation in average earnings growth to below 3.5 percent later this year, the economist added.

FHN Financial: "From the Fed's perspective, inflation is still the key to policy," economist Chris Low said. "With inflation running just above 4 percent in the first third of the year, the only way to justify a rate cut based on the jobs report would have been abject weakness," Low said.

"That didn't happen, which means all eyes now turn to next Wednesday, when the May CPI is scheduled on the morning of the Fed meeting."

The odds of a rate cut by September, which touched 85 percent yesterday, have fallen back to 59 percent and there is still one cut priced into futures this year, with a second cut now seen as a 50-50 chance, the economist added.

ING: Friday's data confirms that the Fed will be pushing back rate cut projections from 3 cuts this year and 3 cuts next year to most probably 2 cuts this year and 4 next, economist James Knightley said. "...but can't rule them out saying just one for this year."

"We are still looking for a September cut, but we need to see three things," Knightley said.

More evidence of inflation pressures easing and of the slack in the labor market is needed, the economist said.

Further, there needs to be a softening of consumer spending, the primary growth engine in the US. "There was some evidence of that in 1Q GDP revisions and weak April spending data, but the Fed needs to see more," Knightley added.

Oxford Economics: New data does not justify a change to our forecast for the first rate cut to occur in September, followed by one in December, economist Nancy Vanden Houten said.

The economists expects the gain in nonfarm employment to help temper the growing concerns that the economy was slowing abruptly.

"The deceleration in the economy seems orderly and there are not a lot of red flags," Vanden Houten said.

While the Fed focuses on inflation, the central bank is attentive to downside risks to the economy if the labor market stumbles, the economist observed. "Overall, the labor market appears to be roughly in equilibrium, but the Fed needs to walk a tight rope, if it waits for concrete evidence that the labor market is bending, then it is too late."