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. New jobs data released on Friday may help inform policymakers as they try to determine if this is the right moment to take a break.

Unfortunately for central bankers, they have painted a complex picture: While unemployment rose and wage growth slowed in May, there was evidence of the Fed’s cooling off, actual job gains were much stronger than economists expected.

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 the 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.

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Friday’s job market data provided both 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.

These conflicting signals—of mitigation on the one hand and flexibility on the other—owe in part to the different results coming from the two different surveys that were used in the monthly employment report. But the split screen in the labor market could make the Fed’s job of figuring out how to set policy more difficult.

He expects the Fed to “skip” and raise rates this month, said Gennadiy Goldberg, a rate analyst at TD Securities.

“Given this positive payroll surprise, I still think the Fed has more room to tighten — they have a tough conversation ahead of them in June.”

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, said 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.

Philip Jefferson, the Fed governor who was chosen by President Biden to be vice chair of the institution, said the comment in letter this week.

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“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.

Investors seem to think that the new jobs data may complicate the upcoming Federal Reserve decision. they push up The probability that the price will move this month after the report, based on financial market prices. However, they still see a one in three chance of an increase.

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.”

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