Fed Seen Sticking With Rate Pause as Wages Show Some Cooling

Signs of labor-market slackening in May despite a pickup in hiring are likely to keep the Federal Reserve on hold this month while policymakers mull a hike later in the summer.

(Bloomberg) — Signs of labor-market slackening in May despite a pickup in hiring are likely to keep the Federal Reserve on hold this month while policymakers mull a hike later in the summer.

US nonfarm payrolls increased 339,000 last month after an upwardly revised 294,000 advance in April, a Bureau of Labor Statistics report showed Friday. The unemployment rate rose to 3.7%, while wage growth slowed to 4.3% over the year.

The mixed report could strengthen the argument from Chair Jerome Powell and other officials that they should take more time to assess incoming data and the evolving outlook before raising rates again. 

The Federal Open Market Committee has lifted the federal-funds rate by 5 percentage points in the past 14 months to curb inflation running more than double its 2% target. With their benchmark rate now in a 5% to 5.25% range following a quarter-point increase in early May, policymakers have signaled an intent to skip a rate hike this month, but not necessarily stop hikes altogether.

“We are sticking with our base case that the Fed will hold policy steady at the upcoming meeting,” said Rubeela Farooqi, chief US economist at High Frequency Economics. 

Traders upped their bets of the Fed raising rates by the end of July. Bets on a hike at the June 13-14 gathering also rose, though investors still leaned toward expecting a pause. Markets were pricing in 31% odds of a June hike following the report, up from 24% a day earlier.  

The yield on two-year US Treasuries, which mostly reflects an assessment of Fed plans for that period, rose 10 basis points to 4.46% following the report.

Odds of a June hike declined this week after Governor Philip Jefferson, a centrist who’s nominated to be vice chair and who often echoes Chair Jerome Powell’s views, said Wednesday that skipping an increase would give policymakers time to assess data but not preclude future tightening. 

“I still think Fed is on hold in June,” said Stephen Stanley, chief US economist at Santander US Capital Markets in New York. “Whether they hike in July and or September will depend mostly on the inflation data, but the ongoing strength in the labor market certainly weighs at the margin toward the need for more tightening.”

Some Fed officials have argued they need to see more slack in the labor market to cool off inflation, especially in the labor-intensive services sector. In that regard, the  surge in the unemployment rate, which was the biggest one-month increase since April 2020, should suggest less pressure on prices.

What Bloomberg Economics Says…

“A surprisingly robust pace of payroll gains for May – stronger than the highest estimate in Bloomberg’s survey of economists – underscores the difficulty of getting a clean read on the labor market. In our view, the labor market is softer than the headline figure suggests, with household employment actually contracting in May.”

— Anna Wong, Stuart Paul and Eliza Winger, economists

To read the full note, click here

Fed policymakers have also been concerned about the impact of bank failures in March on credit conditions, which they believe will lead to lesser availability of lending and hurt growth later this year. They also want to take time to assess the impact of past rate hikes, which has been the fastest hiking cycle in four decades.

A pause in June should not be seen as a peak in the tightening cycle, officials have emphasized. While some regional Fed presidents have argued rates need to go higher to address inflation, the policy committee could hint at a future hike as a way to gain a consensus between the various sides.

“After today’s data it is still a close call” on June, said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington, which is expecting a hike this month. “If they don’t hike in June we are assuming they have to hike in July. The core leadership leans to pausing but numerous others disagree strongly.”

–With assistance from Vince Golle.

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