The non-farm report is mixed, and the Fed may still pause the interest rate hike in June

The Labor Department reported Friday that nonfarm payrolls increased by 339,000 seasonally adjusted jobs in May, well above the 190,000 expected by economists surveyed by The Wall Street Journal and marking the 29th straight month of gains. While the hiring market is hot, other indicators in the report, including a rising unemployment rate and slowing wage growth, make it difficult to judge the signal for rate hikes.

The report showed that the unemployment rate rose to 3.7% in May, higher than the expected 3.5%. The unemployment rate was the highest since October 2022, but still close to the lowest level since 1969.

The rise in unemployment was driven mainly by a 369,000 drop in self-employment. That was part of a 310,000 drop in employment in the household survey, which is used to calculate the unemployment rate and is generally considered more volatile than the establishment survey used for overall employment.

Meanwhile, the overall employment data was driven by increases in the service sector, where staffing levels appear to remain below pre-Covid 19 norms. The leisure and hospitality sector added 48,000 jobs, while the health care sector added 52,400. Employment in the goods-producing sectors continued to remain stable: manufacturing employment fell by 2,000 jobs, while construction gained 25,000.

Average hourly earnings, a key inflation indicator, rose 0.3% this month, in line with expectations. Annual wage growth was 4.3%, 0.1 percentage point below expectations. The average workweek fell 0.1 hour to 34.3 hours.

One message from the report is that banking problems sparked by the collapse of Silicon Valley Bank in March still don’t appear to have had much of an impact on the job market. While the decline in the number of self-employed people could indicate that it’s harder for people to get loans to start their businesses, established companies don’t appear to be laying off workers.

Market expectations for a June rate hike rose slightly after the jobs report, with traders' bets on a 25 basis point rate hike briefly rising to 38% before retreating below 30% at press time, according to CME Group data.

No action in June

Fed policymakers have been working to keep their options open in recent weeks, with some arguing inflation remains the main risk and others arguing a recession is imminent.

Some Fed officials have said or suggested they may keep interest rates unchanged at the June 13-14 meeting. BitPush previously reported that Philadelphia Federal Reserve Bank President Patrick T. Harker said this week that he was "absolutely in favor of considering no rate hikes at this meeting."

Federal Reserve Governor Philip Jefferson, who has been nominated as vice chairman, said on May 31 that the central bank is inclined to keep interest rates stable at its June 13-14 meeting to give policymakers more time to assess the economic outlook.

Kathy Bostjancic, chief economist at Nationwide, said in a report that the Fed seems "inclined to skip tightening in June but may resume tightening in July. Today's strong employment data supports this action."

In addition, before the report came out, some forecasters believed that the May data might be affected by temporary factors.

According to the Wall Street Journal, Goldman Sachs economists believe that due to the tight labor market and many young people are still in school, companies that add jobs in the summer will have difficulty hiring. Morgan Stanley economists believe that factors used by the Labor Department to smooth seasonal fluctuations will drive the number of jobs down. Despite these obstacles, the fact that the May employment report still showed such strong growth suggests that the June employment report may also be very strong.

Half a basis point rate hike in July?

With concerns about the U.S. debt ceiling and banking risks somewhat reduced, the central bank's focus will be entirely on still-high inflation and a much stronger-than-expected job market, and policymakers are likely to raise interest rates again by July.

Former U.S. Treasury Secretary Lawrence Summers said in an interview with Bloomberg on Friday that if the Federal Reserve chooses to delay tightening credit this month, it should be open to raising interest rates by 0.5 percentage point in July.

Summers pointed out that economic forecasters have underestimated the strength of job growth for 14 consecutive months and the U.S. labor market is still hot, which shows that they have exaggerated the impact of monetary policy on the economy. He said: "I think the Fed will eventually do enough to curb inflation, which will mean that the economy will be quite weak sometime in 2024."