Huge US jobs growth hammers Federal Reserve interest rate cut hopes

  • Non-farm payrolls increased by 272,000 jobs in May, according to US figures  

The US Federal Reserve could keep interest rates on hold for the rest of 2024, following much stronger than expected jobs market data.

Non-farm payrolls increased by 272,000 jobs in May, according to the US Labor Department’s Bureau of Labor Statistics, surpassing forecasts of 120,000 to 185,000.

The US faces stubbornly sticky consumer price inflation, which sat at 3.4 per cent for April, as the labour market and broader economy continues to show strength against the impact of previous Fed rate hikes.

Markets think it is unlikely the Fed will follow the ECB with rate cuts next week 

US Treasury yields and the dollar jumped while stocks fell in the wake of the data, as investors pushed back expectations of when the first Fed rate cut will happen.

David Goebel, investment strategist at wealth manager Evelyn Partners, said: ‘Overall, labour demand in the US continues to look robust, and the “soft”, or even “no”-landing [economic] scenarios looking all the more likely.

‘Prior to the data today, money markets suggested the first rate cut from the Federal Reserve would take place in September or November, but that probability has now been pushed lower.

‘Nonetheless, today’s jobs report paints a picture of a labour market in good health, and one that can provide a backdrop for continued equity market strength.’

Investors now all but rule out any chance of Fed rate cuts at its 12 June and 31 July meetings, while predicting just a 50 per cent chance rates will fall in its September meeting, according to the CME FedWatch tool.

And markets think there a chance of around 10 per cent that the Fed will keep its key interest rate range at its current level of 5.25 to 5.5 per cent by year-end.

Neil Birrell, chief investment officer at Premier Miton Investors, said: ‘The economy is still moving along at quite a rate it seems, which is bad news for anyone banking on the Fed cutting rates soon.’

‘After this number, the end of the year might be nearer the mark for the Fed to follow the rate moves in Canada and the Eurozone.’

The European Central Bank and Bank of Canada opted to leapfrog the Fed with their first rate cuts earlier this week, but expectations that the Fed will hold off for longer are likely to weigh on the pace of either bank’s easing. 

But Hetal Mehta, head of economic research at wealth manager St. James’s Place, warned it is ‘hard to see the Fed cutting rates even in December if this trend continues’.