Why the May jobs data is complicating the inflation picture for the Fed

Fed officials have indicated that they may hold rates steady at their next meeting in June – pausing after a series of 10 consecutive rate increases to give themselves time to see how the economy shapes up.

Even after new jobs data released on Friday showed strong employment in May, the Fed may still be on track for this more patient approach. While employers are still adding workers, other aspects of the report — including a jump in unemployment and a slowdown in wage gains — clouded any signal coming from the data.

Investors seem to think the employment report could complicate the Fed’s next decision, but not to the point that they might be a game-changer. Wall Street push up The probability that the price will move this month after the report, based on financial market prices. But even so, they still see a one in three chance of an increase.

Central banks raised interest rates for a range of From 5 to 5.25 percent As of last month, up sharply from nearly zero at the start of 2022. But they have been signaling that it may soon be appropriate to take a break from price increases until they can assess how the economy absorbs the big policy changes they’ve already done and the consequences of the developments. Others, including the fallout from the recent banking turmoil.

Higher interest rates cool the economy by increasing the cost of borrowing to buy a home or financing a car, but they take time to have their full effect. In response to steep borrowing costs, companies gradually backtrack from expansion plans and slow hiring, which then leads to weaker wage growth and a slowdown in the overall economy.

This is why labor market data is so important: It is a referendum on how well policy has cooled the economy, and it hints at whether inflation is likely to slow. Officials worried that the rapid growth of wages might prompt companies to continue to raise prices rapidly while trying to prevent higher wage bills from eating into profits.

Friday’s numbers provided good and bad news for policymakers. The unemployment rate jumped to 3.7 percent, compared to 3.4 percent in the previous reading, and wage growth slowed slightly. However, employers added 339,000 jobs in May, far more than economists expected and a rebound from the previous month.

The conflicting evidence – of mitigation on the one hand and flexibility on the other – owes in part to the different results coming from the two different surveys that were used in the Monthly Employment Report. But screen splitting in the labor market could make the Fed’s job of figuring out how to set policy more difficult, at least on the fringes.

“Given this bullish surprise in the payroll, I still think the Fed has more room to tighten,” said Gennady Goldberg, interest rate analyst at TD Securities. They have a difficult conversation ahead of June.

But some Fed officials have already said they’d prefer to delay a June rate hike, giving them more time to see how higher borrowing costs and heightened uncertainty combine to constrain the economy. Patrick T. Harker, President of the Federal Reserve Bank of Philadelphia, he said earlier this week He is “definitely in the camp thinking of skipping any hikes at this meeting.”

In a sign that there may be a pause, a key official stressed earlier this week that the meeting’s cancellation of rate hikes would not mean the Fed is done raising rates altogether.

“The decision to hold the interest rate steady at an upcoming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Philip Jefferson, the Fed governor who was chosen by President Biden to be vice chair of the institution, said in a statement. letter On May 31st.

“In fact, skipping a rate hike at an upcoming meeting would allow the committee to see more data before making decisions about how steady additional policy is,” Mr. Jefferson added. The Fed vice chair is traditionally an important communication for the institution, the person who broadcasts how key officials think about the policy path forward.

Julia Coronado, founder of MacroPolicy Perspectives, said she doesn’t think the strong overall increase in jobs will be enough to dissuade Fed officials from stalling at the June 13-14 meeting. She said other details of the report — from working hours to the unemployment rate — confirmed that the economy was cooling.

Big payroll gains, she said, “are the anomaly here.” “Everything else speaks of a cooler job market.”