May 2022 – Scott Rosenquist, CFA®
The latest employment data release showed continued strength in the U.S. labor market. The number of jobs added in the month of April was 428,000, higher than expectations of 400,000. The unemployment rate held steady at 3.6%, just above the pre-pandemic level of 3.5%. The gains were broad-based led by leisure and hospitality (+78k) where employment there remains down 1.4 million from pre-pandemic levels. What does this mean for monetary policy?
The Federal Reserve raised interest rates last week by half a percent, higher than the typical quarter-point raise. Expectations are for similar hikes in the coming meetings this summer as Fed officials try to cool demand and bring down inflation. The housing market is a good example of this as mortgage rates have increased from the low three percent range in January to above five more recently. The job market remains tight as the number of job openings showed 11.5 million which exceeds the number of unemployed seeking work. This mismatch has driven wages higher feeding inflation. The strength in the current labor market has given the Federal Reserve the green light to tighten policy quickly in terms of interest rates and the reduction of the balance sheet.
The goal for the Fed is to front-load higher rate increases while the economy remains strong and to navigate a “soft landing” by not tightening conditions so much that it drives the economy into a recession. This will be a difficult balancing act for the Federal Reserve. Recent market expectations are for the Fed Funds rate to be near the 2.50-2.75% range by year-end. It will take time for the policy changes to filter through the economy, but in the meantime, we continue to monitor economic conditions and data as it is released.
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