US Fed Policy: Powell-led FOMC to hold status quo on rates over diverging trends in labour market; core CPI eyed

The Bureau of Labor Statistics reported last week that the US non-farm payrolls increased by 272,000 for the month, considerably higher than the Wall Street consensus of 190,000 and well above April’s comparatively muted gain of 165,000. In addition, average hourly earnings rose 4.1 per cent over the past 12 months, more than expected.

With labour supply dropping, average hourly earnings grew, rising by 0.4 per cent month-on-month (MoM) in May from 0.2 per cent in April. Overall, the robust pace of hiring will likely compel chair Jerome Powell-led Federal Open Market Committee (FOMC) to retain its guidance of keeping rates elevated and maintaining status quo in the policy meeting, according to ICICI Bank.

Also Read: Fed policy rate to stay at 2-decade high-mark, US inflation may not drop significantly in 2024: Powell

US labor market signals diverging trends

Market analysts said that beyond signaling a still-vibrant labor market, the data at the very least adds to the narrative that the US Fed does not have to rush to lower interest rates. As such, futures traders cut bets on rate cuts which meant a stronger US dollar for now.

‘’Pricing in Fed funds futures pointed to almost no chance of a reduction at either the FOMC meeting on Wednesday or on July 30-31. From there, pricing indicates about a 50-50 chance of a September move, and only about a 43 per cent probability that the Fed will follow up with a second cut before the end of the year,'' said Justin Khoo, Senior Market Analyst, APAC - VT Markets.

The level of growth in average hourly earnings continues to remain much above the 3.2 per cent threshold that was witnessed over the 2018-19 period and above the central bank’s threshold level that it believes is compatible with its two per cent inflation target.

Also Read: US inflation resumes downward trend, eases to 0.3% in April; core CPI cools for first time in 6 months

Overall, the labor market data shows a fairly mixed picture from the two surveys. The tentative signs of a re-balancing in the labour market are visible from the fact that job openings are trending lower, initial jobless claims have moved higher and unemployment rate has moved higher. 

US dollar and UST yields moved sharply higher, responding to the robust hiring figures. The US consumer price-based inflation (CPI) release will work as a pivotal driver for price action in the near-term, according to brokerages.
 

US Fed eyes May inflation data

Economists at ICICI Bank said that the FOMC may not change its bias to keeping rates higher for longer given the diverging signals visible in the labour market release for May, although focus will continue to remain on the core services inflation momentum. 

In this regard, the US CPI release (due on June 12) will released on the same day as the FOMC meeting will be followed closely to examine whether disinflation rate is continuing and becoming more broad-based in nature. 

‘’In the upcoming policy meeting, we expect the FOMC to maintain status quo and signal that rates will remain elevated until there is greater evidence of labour market re-balancing and disinflation unfolding simultaneously,'' said ICICI Bank.
 

Overview

The US Federal Reserve left the benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent for the sixth straight meeting on May 1, in line with Wall Street estimates. The rate-setting panel, at its third policy meeting of the year, unanimously voted to hold the policy rate at the 23-year high mark, saying ‘’there has been a lack of further progress toward the Committee's two per cent inflation objective.''

US inflation rose less-than-expected in April 2024, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to Wall Street expectations for a September interest rate cut by the US Federal Reserve. The US CPI rose 0.3 per cent sequentially. In the 12 months through April, the CPI increased 3.4 per cent year-on-year, which follows a 3.5 per cent rise in March 2024. The annual increase in consumer prices has dropped from a peak of 9.1 per cent in June 2022, however the progress has since slowed. 

‘’We expect the restrictive monetary policy regime to work to cool the labour market. The downward revisions in the previous two months shows that on a trend basis hiring is slowing that should likely become gradually more pronounced over the remainder of the year. While we maintain our expectations for a September cut, the odds have reduced and it remains contingent on the evolution of data,'' said economists at ICICI Bank.