The U.S. labor market held steady even as fewer jobs were created in June than expected. So, taking inflation into account, the Fed may raise rates again.
Despite the Fed’s rate hikes, the U.S. labor market is largely healthy and businesses are creating many new jobs. Excluding agriculture, 209,000 new jobs were created in June, according to the Washington government. Economists, however, had expected an increase of 225,000 jobs.
Also in May, jobs were revised up by just 306,000 instead of the 339,000 initially reported. Further rate hikes by the Fed are still seen as a consensus, although some analysts said the data was disappointing. Due to demographic trends, job creation continues to be well above the level needed to stabilize labor market conditions. Unemployment also fell, while wages continued to rise significantly.
Will the last interest rate hike be at the end of July for the time being?
“Even if the labor market cools, it may still be too strong from the Fed’s point of view,” Commerzbank expert Christoph Balz explained. “The Fed could raise rates again this month.” U.S. currency Authorities have tightened monetary policy sharply to curb high inflation and cool an overheated labor market. The current prime rate range is 5.0% to 5.25%.
In June, the Fed took a break after raising rates 10 times in a row, but announced further tightening at the same time. Many central bankers said further developments in the economy were decisive. Alexander Krüger, chief economist at private bank Hauck Aufhäuser Lampe, said the labor market was generally strong. “The Fed is likely to push for further rate hikes.”
According to the employment data, the US financial market expects the possibility of further interest rate hikes by the end of July to increase by 0.25 percentage points to about 90%. However, market participants were skeptical about further possible steps. They see only about a one-third chance of an increase in November.
VP Bank chief economist Thomas Giesel believes that the widely expected tightening of monetary policy at the end of July may be the “last interest rate hike”. As the “first slight crack” in the hitherto strong US labor market is evident.
“Handsome “wage rise” more than four percent
Meanwhile, the separately determined unemployment rate in the US fell slightly as expected in June to 3.6% from 3.7% in May. Economists’ rule of thumb is that adding 70,000 to 100,000 jobs a month is enough to provide jobs for the growing U.S. working-age population.
A major concern for the Fed is wage development, as a sharp rise in wages could raise additional inflation risks. Average hourly earnings rose 4.4% in June from a year earlier, after a revised 4.4% increase in May. Experts polled by Reuters put the increase at just 4.2%. Compared with May, average hourly wages rose 0.4%, unchanged from the previous month.
Helaba expert Ralfcircul speaks of “significant wage increases”. As such, the Fed will stick to its July rate hike plan and “reserve all options depending on how the data develops.”