Federal Reserve officials have indicated they could keep rates stable at their upcoming meeting in June — pausing after a series of 10 consecutive rate hikes to give themselves time to see how the economy develops. New jobs data released Friday could help inform policymakers as they try to decide if now is the right time to take a break.
Unfortunately for central bankers, they made for a complicated picture: While unemployment rose and wage growth slowed in May, evidence of the cooling the Fed has been waiting for, actual job growth has been much stronger than economists had expected.
Central bankers raised interest rates to a range of 5 to 5.25 percent up sharply since last month from near zero at the start of 2022. But they have indicated that it may soon be appropriate to take a break from rising rates so they can assess how the economy can cope with major policy changes they have made and the impact of other developments, including the impact of the recent banking turmoil.
Higher interest rates cool the economy by making it more expensive to borrow to buy a house or finance a car, but it takes time to take full effect. In response to higher borrowing costs, companies are gradually retreating from expansion plans and slow hiring, which in turn leads to weaker wage growth and an overall slower economy.
That’s why labor market data are so important to officials: they’re a referendum on how well policies are working to cool the economy, and they indicate whether inflation is likely to slow. Officials fear rapid wage increases could prompt companies to continue raising prices rapidly while trying to prevent higher labor costs from eating into profits.
Friday’s job market data offered both good and bad news for policymakers at the Fed. The unemployment rate rose to 3.7 percent, from 3.4 percent in the previous reading, and wage growth slowed slightly. Still, May added 339,000 jobs, far more than economists had expected and an increase from the previous month.
Those conflicting signals of softening on the one hand and resilience on the other were due in part to differing results from the two different surveys used in the monthly employment report. But the split-screen in the labor market can make the Fed’s job of figuring out how to set policy all the more challenging.
“If you zoom out and look at trends in the labor market, the numbers still tell you that there is a lot of strength in the labor market,” said Gennadiy Goldberg, an interest rate strategist at TD Securities who expects the Fed to “skip the skip.” and raise rates this month.
“Given this upward surprise in payrolls, I still think the Fed has more room to tighten – they have a tough talk ahead of them in June.”
Some Fed officials have already said they prefer to postpone a rate hike in June so they have more time to see how higher borrowing costs and heightened uncertainty combine to constrain the economy. Patrick T. Harker, the president of the Federal Reserve Bank of Philadelphia, said this week that he is “definitely in camp thinking about skipping a raise in this meeting.”
And in a signal that a pause may be imminent, a key official underlined earlier this week that it doesn’t mean the Fed is done raising rates if the meeting doesn’t pass rate hikes.
“A decision to keep our policy rate constant at an upcoming meeting should not be interpreted as a sign that we have peaked for this cycle,” said Philip Jefferson, a Fed governor selected by President Biden to be Vice Chairman of the Federal Reserve. become an institution. , comment a speech this week.
“Indeed, skipping a rate hike at an upcoming meeting would allow the committee to see more data before making decisions on the extent of additional policy tightening,” Mr Jefferson added. The Fed Vice Chairman has historically been a key communicator for the institution, broadcasting how core officials feel about the future policy path.
Investors seemed to think the new job numbers could complicate the Fed’s choice in June. She pushed up the likelihood of a rate hike this month after the report, based on financial market prices, though they still saw only a one in three chance that the Fed would move.
As the Fed prepares for a debate on whether to lift borrowing costs, officials will need to consider other data about the economy. A key inflation figure released last week came in firmer than economists had expected, and officials will receive a new consumer price index inflation report the day that their June 13-14 meeting begins.