The robust employment data released on Friday has diminished market expectations for Federal Reserve rate cuts, indicating a strong labor market and wage increases that could contribute to persistent inflation.
The Labor Department reported a surge of 272,000 non-farm payroll jobs in May, significantly surpassing economists' forecasts of 185,000. Additionally, average hourly earnings rose by 0.4% from the previous month, outpacing the anticipated 0.3%.
However, the household survey revealed an increase in the unemployment rate to 4% from April's 3.9%, marking the first rise since January 2022.
For further insights: U.S. Job Growth Surpasses Estimates in May Despite Rising Unemployment Rate.
### Economists' Views:
**Nationwide:**
According to economist Kathy Bostjancic, the better-than-expected payroll growth could sustain inflationary pressures and postpone Federal Reserve rate cuts to later this year or next. "We had anticipated rate cuts beginning in September, totaling 50 basis points for the year, but enduring strong employment gains heightens the chance of delayed rate cuts," Bostjancic noted.
**Commerzbank:**
Economist Berd Weidensteiner remarked, "The data does not indicate imminent Fed rate cuts." The Fed is likely to adopt a cautious approach as the labor market remains robust, offering limited relief from inflationary pressure. However, strong job growth reduces the risk of an economic slowdown. "Our forecast for the first rate cut in December stands confirmed," Weidensteiner added.
**Capital Economics:**
Economist Paul Ashworth observed that the larger-than-expected increase in payrolls may alleviate concerns about the economy, while rising average earnings keep the Fed focused on inflation risks. "Alternative QCEW employment data suggests significant downward revisions for the second half of the year, potentially revealing recent outperformance as illusory," Ashworth said. "Post-revisions, we expect slower, not declining, employment growth."
**FHN Financial:**
Economist Chris Low highlighted that inflation remains central to the Fed's policy decisions. "With inflation slightly above 4% in early 2023, justifying a rate cut would require significant job market weakness, which wasn't evident," Low noted. "Attention now shifts to next Wednesday's CPI release before the Fed meeting."
The probability of a rate cut by September has dropped to 59% from 85%, with one cut priced into futures for this year and a second seen as a 50-50 chance, Low added.
**ING:**
Economist James Knightley suggested that the new data confirms the Fed will likely reduce its rate cut projections from three this year and next to possibly two this year and four next. "We still anticipate a September cut, conditional on evidence of easing inflation pressures and labor market slack," Knightley said. Sustained consumer spending softening is needed. "While there were signs in Q1 GDP revisions and weak April spending, the Fed requires more evidence," Knightley added.
**Oxford Economics:**
Economist Nancy Vanden Houten maintained that the new data does not alter their forecast for the first rate cut in September, followed by another in December. "The non-farm employment increase helps temper concerns of a sharp economic slowdown," Vanden Houten said, noting that the deceleration appears orderly without significant red flags. She emphasized that while the Fed is focused on inflation, it remains vigilant to economic downside risks if labor markets deteriorate. "The labor market appears balanced, but the Fed must act preemptively to avoid delays," she concluded.
