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

Fed officials have signaled they may hold interest rates steady at their next meeting in June — pausing after a series of 10 consecutive rate hikes to assess whether their changes so far are enough to slow the economy and combat rapid inflation.

Central bankers may stay on track for this patient approach even after new jobs data released on Friday showed strong employment in May. While employers are still adding workers, other aspects of the report, including a jump in unemployment and slowing wage gains, have muddied the signal coming from the data.

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

Federal Reserve officials have raised interest rates sharply over the past year and a half, sending them into a range of from 5 to 5.25 percent As of last month, up sharply from nearly zero at the start of 2022. After all that adjustment, policymakers have been preparing to hold off on price hikes at every meeting. Pausing will allow their policies more time to play their part while reducing the risk that policymakers will go too far.

Officials want a slowdown in economic growth, because they believe a lull is needed to bring inflation back under control. But at the same time, they do not want to destroy the economy and cause a more painful regression than is necessary by overreacting with their politics.

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Several central bankers have said or suggested they could leave interest rates steady as soon as they meet on June 13-14, allowing them to assess how the economy will respond both to changes in their policy and after the recent banking turmoil.

Higher interest rates cool the economy by making it more expensive to get a home or car loan, but they take time to take their full effect. Companies are gradually backing away from expansion plans and shrinking employment as high borrowing costs lead to huge losses. That should eventually lead to weaker wage growth and a slowdown in the 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 some evidence that the Fed’s policies are working as expected. The unemployment rate rose to 3.7 percent from 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. This follows several months of rapid job gains.

The conflicting evidence — on softening on the one hand and resilience on the other — is due in part to the fact that the jobs report consists of two different surveys, each of which sent a different signal in May. A divided labor market screen could make the Fed’s task of figuring out how to set policy more difficult.

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“They have a difficult conversation ahead of them in June,” said Gennady Goldberg, a price analyst at TD Securities.

But abnormally strong employment alone may not be enough to dissuade Fed officials from wanting to pause. Other details of the report — from working hours to the unemployment rate — confirmed that the economy was cooling, said Julia Coronado, founder of MacroPolicy Perspectives.

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

Some Fed officials have said earlier that they would prefer to delay a rate hike in June. Patrick T. Harker, President of the Federal Reserve Bank of Philadelphia, said this week He was “definitely in the camp of thinking of skipping any further at this meeting.”

In a sign that a pause may be imminent, a key official stressed 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 Wednesday.

“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.

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Fed policymakers will receive additional information about the economy before it makes a policy decision: CPI inflation report ready for release which day Their meeting begins in June. Given that, and given the conflicting messages in the jobs report, they may avoid revising their plans too sharply.

“It’s just a weird, crazy mix,” Ms. Coronado said of the employment numbers.

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