Job Market On The Right Track, Fed May Raise Interest Rates By 0.25% In May

Key Points:

• The March jobs report puts the Fed on track to raise rates by 25 basis points in May.
• Economic data continued to slow down after January, signaling weakness in the second quarter, so interest rates may stop rising after the next May hike.
• Non-farm payrolls rose 236,000 yesterday – in line with forecasts – after an upwardly revised 326,000 increase in February, the unemployment rate fell to 3.5%.

The March jobs reports are expected to put the Federal Reserve on track to raise interest rates by 25 basis points in May and possibly pause after that.

The labor market is showing signs of cooling down but is still very scarce. As such, there is still an expectation that the Fed will leave rates unchanged after the May meeting, implying an eventual rate between 5.0% and 5.25%. The continued slowdown in economic data after January means that the economy will weaken in the second quarter, and there is a risk of significant negative growth in the current quarter. By the time it meets in June, the Fed will have plenty of data on the second quarter, which would justify a pause in rate hikes at that point.

“While the data are a bit mixed, the labor market is strong enough and inflation still elevated and sticky to lead the Fed to raise rates another 25 basis points in May,” said Kathy Bostjancic, chief Economist at Nationwide Life Insurance Co. That “could be the last for the tightening cycle, followed by a long pause.”

As mentioned in the previous article, the US released March employment data on Friday. The seasonally adjusted non-farm employment population was 236,000, the projected 239,000, and the last value was 311,000. The US unemployment rate was 3.5% in March, 3.60% expected, and 3.60% previously.

Before their policy meeting on May 2-3, this will be the last jobs report that Fed officials will have access to; however, in the interim, they will continue to receive readings on inflation and employment costs. Despite a recent strain in the banking sector, policymakers have maintained their belief that rates must increase throughout the year to fight inflation.

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