US Jobs Surge in May, but Slow Wage Growth Could Keep Fed Rates Steady

Jobs increased in the United States more than expected in May, but a diminishing rise in wages may allow the US Federal Reserve not to raise interest rates this month for the first time since embarking on its monetary tightening campaign more than a year ago.

On Friday, the Labor Department said in its closely watched jobs report that non-farm payrolls increased by 339,000 jobs last month. The data for the month of April was revised to show an increase in jobs by about 294 thousand jobs, not 253 thousand as stated in a previous report.

Economists polled by Reuters had expected an increase in jobs of about 190 thousand.

The surprisingly strong results in the US job market came despite regulators’ efforts to ease demand and curb inflation, with the central bank raising interest rates 10 times since early last year.

Despite the strong hiring drive, the unemployment rate rose to 3.7 percent, the highest rate in 6 months, up from a 53-year low of 3.4 percent in April.

Wages pressures are also easing, providing some relief to Federal Reserve officials who are struggling to bring inflation back to the Fed’s 2 percent target. Average hourly earnings increased 0.3% after rising 0.4% in April. That reduced the annual increase in wages to 4.3 percent, after rising 4.4 percent in April. The average annual wage growth was about 2.8 percent before the spread of the Corona pandemic.

The report said the labor market remains strong and showed more evidence that the economy is far from the recession that people fear, although more vulnerabilities are emerging.

Stop raising interest temporarily

While expectations are that higher interest rates would slow the economy as borrowing costs rise, making it more expensive to borrow money for major purchases or business expansion, the latest numbers could present a challenge for policymakers considering pausing to raise interest rates. .

“The data shows that job growth continues at a rapid pace, but wage pressures are not increasing,” Rubela Farooqui, chief US economist at High Frequency Economics, said in a report to AFP.

Although the employment numbers were much higher than analysts had expected, Farooqi said the payroll data could give the Fed room to freeze its policy.

Speaking with Bloomberg, Farooqi said, she still stands by her expectations that the Fed will keep its policy steady at the next meeting.

Fed policymakers are due to meet in mid-June, and some senior US central bank officials have signaled this week that they may support not adopting another hike at their next meeting.

The main factor in this is that officials look forward to the delayed effects of interest rate hikes that have been passed on various sectors of the economy while they decide whether more measures are needed.

An area of ​​particular concern is that strong demand for workers and continued wage growth could fuel inflation. But if wage gains do not pick up, that could ease the pressure on policymakers.

Following the jobs data release, traders raised their bets that the US central bank will raise interest rates in June as well as July, although investors are still leaning towards a pause in rate hikes.

The new jobs report, which gives mixed signals, may support the Federal Reserve’s argument that it should wait for more data before deciding the next course of interest movements, which supports the idea of ​​temporarily stopping interest rates this month, with the possibility of returning to increase them again in the summer.

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“Several Fed officials have indicated that they are likely to hold rates steady at their next meeting in June but are unlikely to cut them at any point,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told AFP. This mixed report is likely to somewhat support this approach.”

In the same context, Stephen Stanley, chief US economist at Santander Bank, told Bloomberg, “I still think the Fed will suspend the increase in June.”

“Whether the next increase is in July or September, or both, will depend mainly on inflation data, but continued strength in the labor market will have a marginal impact on the need for further monetary tightening,” he added.