Federal Reserve policymakers have been weighing the decision on when to start interest-rate cuts, and recent data has provided them with fresh reasons to remain on standby. A Labor Department report showed that U.S. employers added 275,000 jobs last month, surpassing economists’ expectations. However, revisions of prior months’ job gain estimates revealed smaller numbers than initially thought. Additionally, the report indicated signs of labor market cooling, as the U.S. unemployment rate rose to 3.9%, its highest level in two years.
Despite robust job growth, wage growth has continued to edge down, with an increase of 4.3% in February from a year earlier, down from 4.4% in January. While this growth is not yet in line with the Fed’s 2% inflation goal, it is moving in the right direction. Federal Reserve Chair Jerome Powell mentioned in testimony on Capitol Hill that the economy is healthy and policymakers are close to having enough confidence in inflation’s downward trajectory to consider reducing interest rates.
Futures contracts that settle to the Fed policy rate are now indicating an 80% chance that the Fed will begin cutting interest rates by mid-June, with a possibility of a May 1 start as well. Traders are increasingly expecting a full percentage point of rate cuts by the end of the year, equivalent to four quarter-point reductions over the remaining seven Fed policy-setting meetings.
Federal Reserve policymakers are expected to keep the policy rate within the current 5.25%-5.5% range at their upcoming meeting on March 19-20. With inflation at 2.4%, above the Fed’s 2% goal, policymakers are seeking further reassurance that it is moving downward sustainably before making a decision on rate cuts. Some readings on inflation have been stronger than anticipated since the beginning of the year, leading some Fed officials to consider delaying rate cuts further.
Fed Governor Christopher Waller emphasized the need for a couple more months of data to confirm progress on inflation, noting that strong job gains indicate that there is no rush to cut rates. Policymakers are on the lookout for any signs that the labor market is under strain due to the highest U.S. policy rate in decades. Regions Financial Corp Chief Economist Richard Moody noted that the pace of hiring is slowing, which was to be expected.
While the job growth remains strong and the economy healthy, concerns about inflation and labor market cooling continue to influence the Federal Reserve’s decision-making process regarding interest-rate cuts. The upcoming meetings will be crucial in determining the timing and extent of any potential rate adjustments.
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