rate cut far despite cooling job market

There Job growth in the United States slowed more than expected in the month of April, annual wage increases have cooled, and the unemployment rate has increased slightly. These macroeconomic data, which at first sight are negative, are instead viewed positively by the markets, as they would be a sign that the US economy is cooling, allowing the central bank to cut rates. It is however it is probably too early to expect the Federal Reserve to start cutting interest rates before Septembergiven that the job market remains quite tight.

Data on employed people

According to data released Friday by the Bureau of Labor Statistics, the unemployment rate in the US it rose to 3.9% in April, compared to the previous and expected 3.8% in the previous month, but remained below 4% for the 27th consecutive month.

Furthermore, again in the fourth month of the year, 175 thousand were added jobs in the non-agricultural sectors (the so-called non-farm payrolls), after 315 thousand pay slips had been created in March (figure revised from 303 thousand). The data on employed people, more closely observed than the unemployment rate, was lower than market expectations which indicated an increase of 238 thousand jobs.

The average hourly wages they stood at 34.75 dollars, recording an increase of 0.2% on the month and 3.9% on the year (against expectations for a +0.3 m/m and +4% y/y) after the +0 .3% monthly and +4.1% trend recorded in March. Average hourly wages are carefully monitored by the Federal Reserve as they are a good indicator of both the health of the labor market and inflationary pressures.

The Fed meeting

At its meeting this week, the Fed's Federal Open Market Committee maintained the fed funds rate at 5.25%-5.50%, as expected. In the press conference, the President Jerome Powell he stated that, in his opinion, monetary policy is currently restrictive and is having an impact on the economy and the labor market, and that in his opinion it is sufficiently restrictive to bring inflation back to 2% “over time”. This likely remains the Fed's baseline scenario. However, Powell did not mention an intention to start cutting rates “at some point this year” as he had done in previous meetings.

Additionally, Powell presented two main scenarios: one in which inflation proves more persistent than expected and the labor market remains strong, which may require keeping rates unchanged; and a second scenario in which inflation moves sustainably towards 2%, or there is an unexpected weakening of the labor market: the occurrence of either of these two events would lead the Fed to consider rate cuts ( but Powell specified that the FOMC will not react to one or two months of good inflation data, more evidence is needed to consider rate cuts). In short, a will be maintained “meeting by meeting” approach and entirely dependent on data.

Rate expectations

After the Fed meeting and before the release of the labor market data, i markets were discounting very little chance of action at the FOMC meeting on June 12th, equally little chance of cuts by September and a certain probability of cuts by December. It should not be forgotten that only three months ago the market was fully discounting 150 basis points of rate cuts this year starting from the March FOMC meeting.

After slowing job growth and cooling wage increases, the bar may be set high Septemberalthough we will have to wait for the data coming out in the next two months to confirm this scenario.