As policymakers remain vigilant for signs of strain in the labor market amid the backdrop of the highest U.S. policy rate in decades, analysts suggest that Friday’s jobs report may not offer much in terms of such indicators.
Amid ongoing scrutiny from policymakers regarding potential weaknesses in the labor market due to historically high U.S. policy rates, analysts are skeptical that Friday’s jobs report will provide significant evidence to support their concerns.
Federal Reserve policymakers were presented with fresh insights on Friday as they deliberated on the timing of potential interest rate cuts. A government report showcased robust job growth in February, with U.S. employers adding 275,000 jobs, a figure that exceeded economists’ expectations of 200,000. However, the report’s revisions of prior months’ estimates revealed smaller job gains in January and December than previously believed, indicating ongoing adjustments in the labor market.
Despite the positive job growth, there were signs of cooling in the labor market that could influence the Fed’s approach to inflation. While the U.S. unemployment rate rose to 3.9%—its highest level in two years—it still remained below the sustainable threshold as perceived by the Fed. Additionally, wage growth showed a slight decline, with an increase of 4.3% in February from a year earlier, down from January’s 4.4%. Although this growth may not yet align with the Fed’s 2% inflation goal, it suggests movement in the desired direction for policymakers.
During testimony on Capitol Hill this week, Fed Chair Jerome Powell expressed confidence in the economy’s health and indicated that policymakers are nearing the threshold of confidence regarding the direction of inflation, hinting at potential interest rate cuts. Friday’s labor market report, showcasing sustained strength but gradual easing, is expected to provide reassurance to the Fed that economic conditions remain conducive to inflation converging towards the 2% target, potentially prompting rate cuts by June, according to Krishna Guha of Evercore ISI.
Market sentiment reflected in futures contracts suggests an 80% chance of rate cuts by mid-June, with expectations for a total reduction of one percentage point by year-end across four quarter-point cuts over the remaining Fed meetings. Despite inflation still exceeding the 2% goal, Fed policymakers, led by Chair Powell, consider the current rate range likely to be the peak, signaling a downward pressure on price pressures. However, some policymakers, including Fed Governor Christopher Waller, advocate for patience and additional data verification before committing to rate cuts, citing strong job gains and a need for caution in altering monetary policy.
Nonetheless, analysts note that the slight cooling in hiring pace does not signal an imminent downturn in the labor market, underscoring the overall resilience observed in Friday’s jobs report, as highlighted by Regions Financial Corp Chief Economist Richard Moody.