The Fed: Fed will view April jobs report as signaling it does not have to rush to raise interest rates
Federal Reserve officials will be pleased with the April jobs report, saying it justifies their policy to gradually lift interest rates, economists said Friday.
“It means they can be gradual. There is no rush,” said Michael Hanson, chief U.S. macro strategist at TD Securities.
“The Fed still expects a pickup in wages and prices. But the market got ahead of itself how fast inflation is turning,” he added.
The economy added 164,000 jobs in April to push the unemployment rate below 4% for the first time in 17 years. Despite this, wage pressure softened. The 12-month increase in wages was 2.6% in April and the prior month’s reading was also revised down to 2.6%.
Read: Unemployment rate falls to lowest level since Bill Clinton was president.
Hanson said he defined gradual as quarter-percentage point rate hikes at the Fed’s meetings in June and September. A move in December is not in his forecast at the moment, he said. Many economists have that additional move penciled in.
Traders who use fed funds futures contracts now see a June rate hike as a certainty, according to CME FedWatch.
Most Fed officials are split between 3 or 4 rate hikes this year. The central bank has already hiked once in March.
“The jobs number tells them gradual is the way to go,” agreed Omair Sharif, senior U.S. economist at Societe Generale.
After its policy meeting this week, the Fed downplayed inflation concerns, even though its favorite inflation gauge, the personal consumption expenditure price index, rose to a 12-month rate of 2%, hitting the Fed’s target for the first time in a year.
“They did as little as they had to do to acknowledge that inflation had moved up,” and signaled they would allow inflation to temporary overshoot its 2% target, Sharif said.
The job report does create a conundrum for Fed officials.
The central bankers have been saying that inflation and wages would pick up once the unemployment rate slipped below 4.5%.
Now Fed officials must be open to the possibility that their measure of “full employment” rate is lower.
“That’s a puzzle for the Fed. Where is full employment,” said Scott Anderson, chief economist for Bank of the West.
Markets had a mild reaction to the jobs report, with the Treasury 10-year note yield TMUBMUSD10Y, -0.50% holding steady at 2.931% and the 2-year TMUBMUSD02Y, +0.18% yield stayed at 2.481%.