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Fed signal for rate pause takes pressure off hot jobs report

Bloomberg
Bloomberg • 5 min read
Fed signal for rate pause takes pressure off hot jobs report
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Federal Reserve officials are signaling they plan to keep interest rates steady in June while retaining the option to hike further in coming months, steering market expectations ahead of a key employment report.

Governor Philip Jefferson, a centrist who’s nominated to be vice chair and who often echoes Chair Jerome Powell’s views, said Wednesday that skipping an increase would give policymakers time to assess data but not preclude future tightening.

That view undercuts the importance of the monthly jobs report, due Friday, which has often been viewed by Wall Street as a key data point swaying policy. Investor bets for a hike at the June 13-14 Federal Open Market Committee plunged to about 35% Wednesday from nearly 60% a day earlier after Jefferson spoke.

“I definitely think this was a signal” and “likely completely in sync with Chair Powell’s views,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “Just the response of market pricing makes it clear that the message is getting through.”

The FOMC has raised rates by 5 percentage points in the past 14 months to curb inflation running more than double their 2% target. With their benchmark rate now in a 5% to 5.25% target range following a quarter-point increase in early May, Powell has said that policymakers could afford to watch the data and the evolving outlook.

The case for a suspension of hikes rests on the idea that monetary policy works with a time lag, so the impact of past rate hikes has yet to fully weigh on the economy and labor market. Moreover, recent bank failures have resulted in tighter financial conditions which will reduce credit availability by an uncertain amount, further hurting the outlook.

See also: Fed rate cuts possible in September after latest US inflation report, says James Bullard

“Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming,” Jefferson said.

At the Fed, the vice chair often speaks for the central bank. While Jefferson has yet to be confirmed by the Senate, economists took his comments as reflecting those of the Fed chair.

Jefferson’s remarks “seem like a campaign,” said Stephen Stanley, chief US economist at Santander US Capital Markets in New York. “He is taking to heart his new role as Powell’s wingman and vice chairman.”

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The message was echoed Wednesday by Philadelphia Fed President Patrick Harker, who also urged a June pause while stressing that officials could instead shift to moving at every other meeting if they need to keep tightening.

There’s good reason for the Fed to want to get out front of a potentially hot jobs report.

Government data on Friday are projected to show payrolls in the world’s largest economy increased by 195,000 in May, but the initial print has exceeded the median projection for the past year. Earnings are seen rising 0.3% from the prior month, when they posted the biggest advance in a year. The unemployment rate is projected to rise 0.1 percentage point to 3.5%.

Powell and other Fed leaders have said they want to see the economy slow to a below-trend pace and the job market to cool off from a level they see as overheated, with unemployment near a multi-decade low.

The chair says while goods prices have shown improvement and housing prices seem poised to ease later this year, other services prices are likely to be sticky and continue to rise in the face of a too-hot labor market.

While Powell has suggested “pain” would be needed to reduce inflation, some officials – including Governor Christopher Waller and Chicago Fed President Austan Goolsbee – have argued that there is not much of a relationship between the labor market and prices. Inflation measured by the consumer price index has fallen to 4.9% from 9.1% last June with a still robust job market.

“The immediate market reaction to a strong payroll figure seems to be automatically hawkish, but I think this is far too simplistic,” said Luke Tilley, chief economist at Wilmington Trust Corp. “We’ve already seen inflation slow significantly even with wages still running a bit hotter than pre-pandemic levels. This can and should lead the FOMC to re-evaluate their view on the connection between the two.”

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Any pause is likely to be met with some resistance as several Fed presidents, including Loretta Mester of Cleveland and James Bullard of St. Louis, who have suggested there’s more work to do to cool off a strong economy and elevated inflation. The Atlanta Fed’s gross domestic product tracker says that second-quarter growth to date is tracking at about a 1.9% rate.

Hawkish positioning

“With consumer spending coming in strong, the jobs market remaining tight and inflation persistently running hot there is little ammunition to counter the hawks’ positioning right now,” said James Knightley, chief international economist at ING.

The Fed does have options to follow a pause with a potential hike in the following meeting in July or September to give time to assess the impact of recent bank failures on credit conditions and of past rate hikes on the economy.

In an effort to win support from hawkish voters, the FOMC could highlight a tightening bias in its post-meeting statement or in the “dot plot” for how officials see the rate path, which showed a median of 5.1% in March.

The Fed will also get the consumer price report for May during the first day of its two-day meeting. While economists see the inflation report as likely more important than employment for Fed policy, the lateness of the report could make the committee reluctant to change its previous plan based on a single data point they haven’t studied in detail.

“Chair Powell and other Fed officials are sensitive to the lagged and cumulative effects of policy after 500 basis points of tightening,” said Farooqi. “Our base case remains that the Fed will err on the side of caution and hold policy steady at the next meeting.”

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