The job market held up in May. But the Fed may have already decided to pause
Washington, DC CNN
In May, the US labor market accelerated again, defying predictions of a slowdown. Federal Reserve officials will likely still suspend rate increases at their next policy meeting due to the broader trends that point to a weaker economy in later part of the year.
There is a lot of debate about whether to suspend rate hikes or to increase them again in June. The robust May jobs report makes it difficult to understand what's happening in the economy. But there are enough arguments for Fed officials who will meet on June 13-14 to justify a pause or'skip' in rate hikes.
This would end a streak that saw 10 successive rate increases, which had pushed the benchmark lending rate of the central bank to the range of 5-5.25%. It was the highest rate in over 15 years.
Some officials said that a pause will allow them to evaluate the impact of the central banks most aggressive rate hike campaign since the 1980s. Others have warned of other factors which are expected to slow down the economy, including tougher lending criteria and the lagged effects from tighter monetary policies. Many economists including those at the Fed still expect a downturn later this year.
This is the main argument for a break. The Fed's nominee to be President Joe Biden’s second in command said this on Wednesday. However, he cautioned it does not mean that the Fed cannot resume rate increases when needed.
Federal Reserve Governor Philip Jefferson said at a Washington, DC conference this week that a decision to keep our policy rate the same at a future meeting does not mean we've reached the maximum rate for this cycle. In fact, the Committee would be better off skipping the rate hike for a future meeting to gather more data.
Patrick Harker, President of the Federal Reserve Bank of Philadelphia, echoed Jefferson’s view last week that a vote to pause economic growth in June would be appropriate due to factors already pulling at the reins of the economy.
Harker, speaking at a virtual discussion moderated by the National Association for Business Economics on Thursday, said: "I believe we are nearing the point where rates can be held and monetary policy will do its job to bring inflation to the target quickly." We should skip this meeting if we are considering an increase. Let's let these issues resolve themselves to the best of their ability before considering another increase.
The Fed may still raise rates this month if, on the first of its two-day meeting, the Consumer Price Index shows that inflation increased in May. Some officials expressed concerns recently about the persistence of inflationary pressures -- but those who are dovish have made a compelling case for a pause.
Julia Pollak is the chief economist at ZipRecruiter. She told CNN that the report should not have a significant impact on the Fed's decision. Instead, it should encourage them to consider all the available data before making a final decision.
The future of disinflation and the labor market
The May jobs report showed that the labor markets remained stable. The Bureau of Labor Statistics announced Friday that employers added 339,000 jobs in May, despite the fact that the unemployment rate increased to 3.7%, from 3.4%. This is the biggest month-over month increase since April 2020. The BLS reported this week that job openings increased to 10.1 millions in April after falling for three consecutive months.
The job market is still strong despite 10 consecutive rate hikes since the Fed began raising rates in March of 2022. This is despite other areas of the economy such as the housing sector buckling in certain areas. This is good news for American workers. However, the jury is still divided on whether this will have a positive or negative impact on inflation. Some economists believe that a strong labor market is having a growing but minor impact on inflation.
Dave Gilbertson is a labor economist with UKG. He said, "If you have talked to CEOs you will know that they all agree there was an inflation problem about a year back, but it has moderated in the last year, even though the labor market continues to be tight." This would indicate that the labor markets haven't had as much of an impact on inflation as supply-chain disruptions two years ago.
In a recent paper, former Fed Chair Ben Bernanke claimed that a downturn in the economy would be needed to deal with the labor market's persistent but minor influence on inflation. This has actually cooled over time.
The Consumer Price Index could cool further due to the slowdown in housing costs. These costs make up over 40% of its core measure.
Jack Macdowell is chief investment officer of The Palisades Group. He told CNN that some of the data will start to appear in the next few months. It will be interesting to see the impact of owners' equivalent rental on inflation, as it is a lagged effect.
A pause is not an option
What about the recent rise in the preferred inflation indicator of the Fed? Personal Consumption Expenditures Price Index rose 4.4% in the 12 months ending in April. This is up from a 4.2% rise in March. Consumer spending increased by 0.8% in that same month.
Officials who are hawkish about the Fed still believe that its job isn't finished. James Bullard of the Federal Reserve Bank of St. Louis, one of Federal Open Market Committee’s most hawkish members, advocated two more rate increases during a moderated conversation last week. In an analysis published on Thursday by Bullard, the St. Louis Fed head struck a more moderate tone regarding inflation's future decline.
He wrote: 'The prospects of continued deflation are good, but not guaranteed. Continued vigilance will be required.
The FOMC may be swayed by the hawks' position if the CPI for May indicates that inflation increased or decreased in that month. Fed Chair Jerome Powell said that the process of bringing inflation down to 2% is a long one and will be bumpy.
Fed's decision-making
As the Fed is nearing a turning point in its war against inflation, some FOMC members may start to dissent as early as the June meeting.
Ian Shepherdson said that in a recent webinar, 'there's always someone who doesn't like to go along with the Fed's changing opinions. I believe this is very likely.
Members may disagree because they believe the central bank should slow down or increase rates at a slower pace. Economists say that the Fed's decision-making is not as clear or easy as it was when inflation was clearly soaring last summer.
It doesn't necessarily mean that they haven’t discussed the issue with their counterparts. The central bank may lose credibility if it does not reach a consensus.
"There's usually no disagreement in policy decisions, but in order to demonstrate confidence, they need to show their agreement to be unanimous, otherwise the markets will start to doubt them," said Eugenio Aleman, Chief Economist at Raymond James.