Fed on track for another big rate hike with US jobs blowout in June

WASHINGTON (REUTERS) – Another blowout jobs number will likely stiffen resolve at the United States Federal Reserve for a 75 basis points interest rate increase at the central bank’s July meeting, as the welcome news of a still-strong job market clashes with concern that it will eventually have to cool to ease inflation.

The US economy added 372,000 jobs in June, a far larger-than-expected number that pushed private employment back above its pre-pandemic level and kept the unemployment rate at an ultra-low 3.6 per cent.

While the jobs data is likely to cool speculation of an impending recession, it could fuel uncertainty about whether the Fed will need to become more aggressive in using higher interest rates to slow the economy and bring consumer inflation down from the current 40-year high of more than 8 per cent.

“I am fully supportive of moving 75 basis points” at the July meeting, Atlanta Fed president Raphael Bostic said on CNBC. “This report just reaffirms that the economy is strong and that there is still a lot of momentum in the labour market, and that is a good thing.”

But that very strength, paired with “sky-high” inflation, could help make the case for further, aggressive rate hikes.

“We must be resolute, and we cannot fall short” in returning inflation to the Fed’s 2 per cent target, New York Fed president John Williams, who also cited an “incredibly tight” labour market, said on Friday in Puerto Rico.

Though Mr Williams did not specifically call out his preferred rate-hike path, he made clear the Fed will battle inflation even at the cost of much slower economic growth and a rise in unemployment to “somewhat” more than 4 per cent. Mr Williams forecast growth at under 1 per cent this year.

Both Mr Williams and Mr Bostic said they were seeing some early signs of the kind of slowdown that could help ease inflation without a deep hit to employment. Both promised to parse those signs against upcoming inflation reports as they weigh the risks to economic growth against the need to temper prices.

Several Fed officials have now endorsed a three-quarter-point increase at the upcoming policy meeting on July 26-27, with attention shifting to how inflation, jobs and other data respond, and what might need to happen next.

While employment is for now secondary to the headline inflation numbers in shaping policy, Fed officials regard the current job market as unsustainably tight, and data this week showed only preliminary evidence that was changing.

The pace of wage increases has declined for three months in a row. But hourly earnings are still rising at more than 5 per cent annually. Job vacancy data for May showed there are still nearly two openings for each unemployed person, and the overall number of people either working or looking for work has shown little change since February – dashing Fed hopes of a steady rise in labour supply.

US stocks fell after the release of the employment numbers, likely because investors saw them as a sign that the Fed would continue constraining the economy.

Traders also bet on bigger Fed rate hikes with interest-rate futures contracts now reflecting a small chance the Fed raises rates by a full percentage point in July. Rate futures contracts reflect a base case view the Fed’s policy rate will be in the 3.5 per cent-3.75 per cent range by year end, higher than Fed policymakers themselves predicted just three weeks ago.

“This calls into question…the narrative that recession is imminent,” said Dr Nela Richardson, chief economist for payroll processor ADP. “This is a bonus for the Fed. They can be aggressive.”