Strong job gains in March may push the Federal Reserve into a more cautious stance on potential interest rate cuts, with mixed signals emerging about the strength of the labor market. After the Labor Department's nonfarm payrolls report on Friday showed a strong gain of 303,000, futures market prices indicated just over a 50% chance that the Fed will start cutting jobs in June. A stronger job outlook increases the likelihood of greater inflationary pressures, meaning the central bank may be less keen to ease policy. In recent days, the prospect of Fed tightening has been poison for stocks, though they saw a strong rally on Friday despite strong jobs data. “There's another slew of jobs making Fed rate cut forecasters very hot,” said Seema Shah, chief global strategist at Principle Asset Management. However, looking on the bright side, Shah added that “[Friday’s] The report should reassure markets that if the Fed does not cut in June, it is because the economy is still strong and earnings should remain rising. The Fed has kept its short-term borrowing rate at its highest level in 23 years, however, some investors and economists still worry that the Fed may be on the leash for too long. Mohamed El-Erian, chief economic adviser at Allianz, said on Friday that the Fed has become overly reliant on rolling data points and should instead focus on long-term strategy. “What they are doing is that this time they will end up tightening monetary policy too much.” Indeed, there is some evidence that labor market strength may not be as strong as the non-farm payrolls numbers indicate. For example, while the nonfarm payrolls numbers reflect total jobs gained through the broad establishment survey, the narrower household survey showed more jobs. Consistently show fewer people actually working. Although the latest count indicated an increase of 498,000 people in March, the number of workers has decreased by about 400,000 since November. There is also the compositional aspect of hiring. Most of the job gains over the past few months have come from a few sectors: health care, government, entertainment and hospitality, although March showed strong gains in the construction sector. Then there is the concentration of earnings on part-time work rather than full-time work. The number of workers who reported holding full-time jobs fell by 6,000 in March, a significant decline of 1.35 million from a year ago. Meanwhile, the number of part-time workers swelled by 691,000 in March, an increase of 1.9 million, or 7%, from a year ago. In addition, there is the level of those who reported having lost their jobs permanently, a number that has risen by more than 30% since January 2023 although it fell in March. Temporary jobs, which many economists look to for signs of a weak labor market, also fell again in March and were down by 181,000 from a year ago, a decline of 6.2%. The role of migration So what makes the headline numbers so high? Economists on Wall Street and at the Federal Reserve suspect that swelling immigration numbers are playing a role in boosting hiring and keeping the labor market too tight. Goldman Sachs, citing data from the Congressional Budget Office and other sources, estimates that 2.5 million migrants crossed the US border in 2023, the highest level in more than two decades, with “illegal immigrants from South America, Central America and Mexico” accounting for 2.5 million. immigrant. “Most recent boom.” Federal Reserve Governor Michelle Bowman on Friday pointed to gains in part-time employment over the past year and said “some of the recent strength in job gains may reflect stronger labor supply due to increased immigration.” Bowman warned that the Fed may have to raise interest rates again in the future if inflation proves stubborn. As the political clamor for the United States to tighten its border controls intensifies, the flexibility of the labor market may be at risk depending on the size of the role played by immigration. Citigroup has the Fed calling, a far cry from the Wall Street consensus, to cut interest rates by 125 basis points, or 1.25 percentage points, this year, based largely on a potential deterioration in the labor market. Futures markets are pricing in three cuts totaling 75 basis points, which is consistent with the informal estimate issued by Fed officials in March. A basis point is one-hundredth of a percentage point. “Another strong report raises the prospect of avoiding the deterioration in labor markets we had been expecting. But we still see enough weakness in the household survey and elsewhere to leave our base line pointing to a larger rise in unemployment later this year.” Andrew Hollinghurst, an economist at Citi, said in a note to the client. “Much stronger than expected job growth typically triggers a more hawkish (or at least less pessimistic) Fed policy,” he added. “But that's not currently the case. That's partly because Fed officials are aware of the same signs of downside risk to future jobs readings as we are.”
