Federal Reserve officials have signaled they could hold rates steady at their upcoming June meeting – pausing after a string of 10 straight rate hikes to give themselves time to see how the economy fares. New jobs data released on Friday could help policymakers decide if now is the right time to pause.
Unfortunately for central bankers, they painted a complicated picture: while unemployment rose and wage growth slowed in May – evidence of the slowdown the Fed had been waiting for – actual job gains were much stronger than economists had expected.
Central bankers raised interest rates last month to a range of 5 to 5.25 percent, a sharp rise from near zero at the start of 2022. However, they have signaled that a pause from rate hikes may soon be appropriate to get there You can gauge how the economy is taking the big policy changes it has already made and the fallout from other developments, including the fallout from the recent banking turmoil.
Higher interest rates cool the economy by making it more expensive to borrow to buy a home or finance a car purchase, but they take time to have their full impact. In response to higher borrowing costs, companies are gradually shedding expansion plans and slowing hiring, which then leads to weaker wage growth and an overall weaker economy.
That’s why jobs data is a focus for officials: it’s a referendum on how well policies are helping the economy cool and it offers clues as to whether inflation is likely to slow. Officials fear rapid wage growth could prompt companies to continue raising prices rapidly to prevent higher wage costs from eating away at profits.
Friday’s jobs data offered both good and bad news for Fed policymakers. The unemployment rate rose to 3.7 percent from 3.4 percent at the previous reading, and wage growth slowed slightly. Still, employers added 339,000 jobs in May, significantly more than economists were expecting and a month-on-month increase.
These conflicting signals of moderation on the one hand and resilience on the other are partly due to differing results from the two different surveys used in the Monthly Employment Report. But the divided labor market could make the Fed’s task of figuring out how to shape policy even more difficult.
“When you zoom out and look at job trends, the numbers still say the job market is strong,” said Gennadiy Goldberg, a rates strategist at TD Securities who expects the Fed to “jump the jump.” and raise interest rates this month.
“Given that upside surprise on payroll, I still think the Fed has more room to tighten — it has a tough conversation ahead of it in June.”
Some Fed officials have already said they prefer to stop raising rates in June so they have more time to see how higher borrowing costs and heightened uncertainty combine to slow the economy. Patrick T. Harker, the president of the Federal Reserve Bank of Philadelphia, said this week that he was “definitely able to consider not raising a hike at this meeting.”
And in a signal that a pause might be imminent, a key official stressed earlier this week that postponing a meeting because of rate hikes would not mean the Fed was done raising rates overall.
“A decision to hold our interest rates steady at an upcoming meeting should not be interpreted as meaning that we have reached the peak of this cycle,” said Philip Jefferson, a Fed governor who was chosen by President Biden to be the institution’s vice chair , he commented in a speech this week.
“Indeed, skipping a rate hike at an upcoming meeting would allow the committee to look at more data before making decisions on the extent of further monetary tightening,” Jefferson added. The vice chairman of the Fed has traditionally been a key communicator for the institution, reporting on how key officials feel about future policy trajectory.
Investors seemed to think the new jobs data could complicate the Fed’s June decision. They increased the likelihood of a rate hike this month following the report’s release based on financial market prices, although they still saw only a one in three chance that the Fed would react.
As the Fed prepares to debate whether to raise borrowing costs or put them on hold, officials have other economic data to consider. A key inflation figure released last week was firmer than economists had expected and officials will receive a new CPI inflation report on the day their June 13-14 meeting begins.