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The U.S. labor market added 272,000 jobs in May, much more than expected, pushing market expectations on the timing of the Federal Reserve’s rate cut.
Data from the Bureau of Labor Statistics for nonfarm payrolls last month compared with forecasts for an increase of 180,000 in a Bloomberg survey of economists.
President Joe Biden, who has battled Donald Trump’s attacks on his economic record ahead of this November’s US presidential election, celebrated what he called the “great American return” to jobs.
He pointed out that unemployment has now been at or below 4 percent for 30 months, the longest stretch in half a century. “On my watch, 15.6 million Americans have more dignity and respect that comes with work,” Biden said.
U.S. employers have continued to hire — often well ahead of expectations — despite a series of interest rate hikes that have pushed borrowing costs to the highest in more than two decades.
But voters have so far been reluctant to credit the president for the economy’s performance, and Biden’s electoral prospects could support interest rate cuts.
After the data was released on Friday, the odds of a rate cut at the Fed’s mid-September meeting – before the election – fell from 81 percent to 57 percent, according to market prices.
Markets had previously fully priced in interest rate cuts by November. After the jobs data was released, it was pushed back to December.
“Strong job growth and rising wage inflation support our long-term view that interest rates will remain higher for longer,” said Torsten Slok, chief economist at Apollo Global Management. “We continue to expect no Fed cuts in 2024.”
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Treasury yields rose in response to the news, with the two-year Treasury yield, which moves with interest rate expectations and inversely to price, jumping 0.17 percentage point on the day to 4.88 percent.
The dollar gained 0.8 percent against the euro, with one unit reaching $1.08 on Friday afternoon. US stocks ended the choppy session slightly lower.
The data comes less than a week before the US central bank’s June meeting, when it is expected to leave interest rates unchanged.
The European Central Bank, on the other hand, cut rates this week for the first time in almost five years.
The strong U.S. payrolls are part of a broader trend in advanced economies. Inflation fell more slowly than expected in 2024, with robust labor markets supporting economic resilience.
The Fed, whose preferred inflation metric is now at 2.7 percent compared to its 2 percent target, has taken a cautious approach to reducing borrowing costs.
Citigroup economists revised their rate cut expectations after the jobs report, betting that the first move would come in September rather than July.
But Citi added that the report “does not change our view that hiring demand and the broader economy are slowing,” and said it would prompt the Fed to cut rates by a total of 0.75 percentage points in September, November and December.
Friday’s data showed average hourly wages rose 4.1 percent in the year to May, well above the rate central bankers see as consistent with reaching their inflation target.
However, the unemployment rate also increased, to 4 percent from 3.9 percent.
Jason Furman, a former administration official now at Harvard University, said the rise in unemployment could be the most important part of Friday’s data release.
“If we wake up next month and the unemployment rate is 4.1 percent, I think it will be.” [the Fed’s] watch out,” Furman said. “If you have unemployment above 4, that would mean cutting rates sooner.”
The payroll for April, previously estimated at 175,000, was cut to 165,000.
“There is very strong job growth, but the unemployment rate has increased,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “It’s going to be a close call for the Fed if they can cut in September, but I don’t think this news takes that off the table.”