Fed gets another reason not to rush on rate cuts

By Thomson Reuters Mar 8, 2024 | 9:19 AM

By Ann Saphir and Howard Schneider

(Reuters) – Federal Reserve policymakers weighing when to start interest-rate cuts got another reason Friday to sit tight for now, after a government report showed jobs growth surged in February but the overall labor market continued to show signs of cooling.

Employers added a robust 275,000 jobs last month, a Labor Department report showed on Friday, handily beating the 200,000 that economists expected.

Still, the report’s revisions of prior months’ estimates showed smaller job gains in January and December than had earlier been thought, suggesting that a long-anticipated slowing in job gains is underway. The U.S. unemployment rate rose to 3.9%, its highest in two years, though still below levels the Fed sees as sustainable in the long-run.

And wage growth has continued to edge down, rising 4.3% in February from a year earlier, down from 4.4% in January. Fed policymakers won’t see that growth as consistent yet with their 2% inflation goal, but it is moving in the right direction.

In testimony on Capitol Hill this week, Fed Chair Jerome Powell said he feels the economy is healthy and policymakers are “not far” from having enough confidence on inflation’s downward direction to start reducing interest rates.

Friday’s signs that the labor market is still strong but easing slowly “will provide reassurance to the Fed that real economic conditions remain broadly consistent with inflation converging durably towards 2%, and it will be appropriate to cut by June,” said Evercore ISI’s Krishna Guha.

Futures contracts that settle to the Fed policy rate now point to an 80% chance the Fed will start cutting interest-rates by mid-June, up from 75% before the report, with a little more than a one-in-four chance of a May 1 start, about the same as before the report.

Traders firmed up their expectations for a full percentage point of rate cuts by the end of the year, the equivalent of four quarter-point reductions over the remaining seven Fed policysetting meetings this year.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)