Soft landing? Why the latest jobs data could leave the Fed with a tricky call
Analysts are divided about whether the US Federal Reserve should hike rates again as they digest last week’s figures on the labour market.
On Friday last week, a closely watched survey of the US labour market showed the economy added 236,000 new jobs in March.
While more jobs are still being added, the report suggests that the labour market is gradually weakening as the Fed continues its tightening campaign.
Chief economist at Pantheon Macroeconomics Ian Sheperdson said the 236,000 figure was “old news”, reflecting the state of the economy before the banking crisis and before the “full impact” of the Fed’s 475 basis points in hikes worked through.
“This is all set to change over the next few months, likely starting as soon as this month; our tentative initial forecast for April payrolls is 150K, and we look for just 50K in May,” he continued.
Sheperdson pointed out that wage pressures are fading as well. “Wage growth has slowed sharply and is no threat to inflation,” Sheperdson wrote, concluding “the Fed should ease, not hike again”.
Analysts at Goldman Sachs took a more optimistic view, suggesting the labour market appears to be heading towards “a somewhat more intense version of its pre-pandemic state”, with low unemployment and fairly low wage growth.
They highlighted that wage growth has fallen slightly even as the unemployment rate has fallen too, arguing wage growth was driven by temporary factors which “faded naturally”.
The figures raised the possibility of a “soft landing”, where higher interest rates returns inflation returns to the Fed’s two per cent target without causing a major downturn.
Analysts at UBS suggested the Fed was likely to raise rates again as the figures showed a “pretty brisk” labour market.
However, they suggested the data would have little impact on the Fed’s next interest rate decision.
“Any decision to pause and not raise rates in March would more likely rest on any re-evaluation of the extent of added credit tightening since March or concern over the health of the banking system,” they wrote, arguing “the data on economic activity looks good enough to hike”.
The consumer price index for March is due out on Wednesday with markets expecting the rate of inflation to slow to 5.2 per cent.
The Fed will meet again in early May for its next interest rates decision, with markets expecting a 25 basis point hike to bring the current hiking cycle to its end.