Jobs Data and Commodity-Price Drop Point to Fed Rate Pause

Recent comments from Federal Reserve officials, including Chairman Jerome Powell, indicate the central bank will likely pause its interest-rate hikes at its June meeting.

Inflation is easing, and it’s unclear how much the Fed’s 10 straight rate increases will hurt the economy. Consumer prices climbed 4.9% in April, the lowest rate in two years.

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Meanwhile, economic growth slowed to an annualized 1.3% in the first quarter from 2.6% in the fourth quarter of 2022.

As for inflation, almost 40% of the consumer price index is made up of commodity prices, according to U.S. Bank. The S&P GSCI (Goldman Sachs Commodity Index) has sunk to its lowest level since December 2021. Sluggish economic growth worldwide is responsible for the descent.

So the price drop obviously dents inflation. For you the consumer, the decrease has likely led to lower prices for gasoline and home electricity, heating and cooling.

Wages and Jobs Play Major Role in Inflation

Wages also play a major role in determining inflation. Average hourly earnings gained 4.3% in the 12 months through May, down from 4.4% in April, according to Friday’s employment report.

The report carried mixed news overall. Nonfarm payrolls gained a hefty 339,000 in May, close to the 341,000 average of the prior 12 months. But unemployment climbed to 3.7% in May from 3.4% in April.

Putting all this together, there is good reason to expect the Fed in June to pause its interest-rate-hike campaign. The federal funds rate currently stands at 5% to 5.25%.

Interest-rate futures positions indicate a 30% probability of a rate rise in June and a 69% chance by July. Fed rates, of course, influence the rates you pay on personal, auto, student and credit-card loans.

How Some Experts View the Jobs Report

Here’s what a few experts had to say about the employment report and its impact on the Fed.

“Robust job gains relative to expectations reflect ongoing peculiarities in the post-pandemic U.S. economy,” said Gurpreet Gill, macro strategist for fixed income at Goldman Sachs Asset Management.

“However, the uptick in the unemployment rate and moderation in wage growth together signify progress in rebalancing the labor market. This is required to bring inflation back toward target.”

What does that mean for the Fed? “We continue to expect a pause in Fed actions going into 2024, but further signs of economic and inflation resilience mean there is still potential for another rate hike this summer.”

Bill Adams, chief economist for Comerica Bank, also expects a pause from the Fed next month, but he didn’t mention the future beyond then.

He noted the “solid” payroll gain, the “jump” in unemployment and “soft” wage growth. “The payroll survey’s details were mostly weaker than the headline,” Adams said.

Jamie Cox, managing partner of wealth management firm Harris Financial Group, sees strength in the jobs report.

“You can throw the near-term recession calls out the window with this jobs number,” he said. “The American consumer is employed and spending.” Consumer spending rose 0.8% in April.

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