Fed rate cut less certain after solid jobs report
American employers sharply stepped up their hiring in June, adding a robust 224,000 jobs, an indication of the economy’s durability after more than a decade of expansion.
The strength of the jobs report the government issued on Friday could complicate a decision for the Federal Reserve late this month on whether to cut interest rates to help support the economy. Most investors have anticipated a rate cut in July and perhaps one or two additional Fed cuts later in the year. That scenario may be less likely now.
Stocks sold off early on Friday before paring their losses later. The Dow Jones Industrial Average closed down a modest 43 points. But the yield on the 10-year US Treasury note climbed to 2.04 per cent from just under 2 per cent before the jobs report was released, reflecting a view that the Fed might now be less inclined to cut rates multiple times.
June’s solid job growth followed a tepid gain of 72,000 jobs in May, a result that had fuelled concerns about the economy’s health. But with June’s pace of hiring, employers have now added, on average, a solid 171,000 jobs for the past three months. Last month’s burst of hiring suggests that many employers have shrugged off concerns about weaker growth, President Donald Trump’s trade wars, and the waning benefits from US tax cuts.
“Although there are drags on the economy in 2019, the expansion should continue through this year,” said Gus Faucher, chief economist at PNC Financial Services. “The doom and gloom was overblown.”
The unemployment rate ticked up to 3.7 per cent in June from 3.6 per cent for the previous two months, reflecting an influx of people seeking jobs who were initially counted as unemployed. Average hourly wages rose 3.1 per cent from a year ago.
Last year, Fed officials raised rates four times, in part to stave off the risk of high inflation and in part to try to ensure that they would have room to cut rates if the economy stumbled.
On Friday, the Fed reiterated in its semi-annual report on monetary policy that it would act as necessary to sustain the economic expansion, while noting that most Fed officials have lowered their expectations for the course of rates.
In Friday’s jobs report for June, the hiring gains were broad. Construction companies added 21,000 workers after having increased their payrolls by only 5,000 in May. Manufacturers hired 17,000, up from just 3,000 in May. Healthcare and social assistance added 50,500 jobs. Hiring by transportation and warehousing companies increased 23,900.
The government sector was a major source of hiring, adding 33,000 jobs in June. Nearly all those gains were at the local level.
A Fed rate cut, whenever it happens, would be its first in more than a decade.
Joshua Shapiro, chief US economist for consultancy MFR, said the likelihood of a Fed rate cut late this month is now slightly lower, though he still estimates that the federal funds rate – what banks charge each other – will be sharply lower by the end of next year.
Ryan Wang, US economist at HSBC Bank, suggested that the solid jobs report might create a communications challenge for Fed Chairman Jerome Powell when he testifies on Wednesday and Thursday to congressional committees.
The financial markets still foresee a rate cut of 25 points this month, Wang said, adding, “It will be important to see if Chair Powell lays out on a strong case for near-term monetary easing in his testimony next week.”