By Ann Saphir and Howard Schneider
(Reuters) – Federal Reserve policymakers seeking greater confidence that inflation is on track to their 2% goal were dealt a setback on Friday when new data showed U.S. job growth surged last month at well above the pre-pandemic pace, and wage growth accelerated.
The numbers – 353,000 new jobs added across a broad range of sectors and hourly earnings up 4.5% from a year earlier – won’t likely push U.S. central bank officials off cutting interest rates later this year.
But the ongoing labor market strength could make the road to rate cuts a longer one as the U.S. labor market shows no signs of cooling, and with revisions to last year’s data showing it was even stronger then than thought, despite the Fed’s aggressive rate hikes.
The central bank on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since July, and while Fed Chair Jerome Powell said that would likely mark the peak, he also said rate cuts would only come once policymakers have “greater confidence that inflation is moving sustainably down to 2%.”
And though Powell also said the Fed no longer sees a weakening job market as necessary to make further progress on inflation, the blowout jobs data for January may do little to assure policymakers that labor market rebalancing is helping to solidify inflation’s downward trajectory.
“Hotter-than-expected payroll and wage growth will likely encourage the Fed to hold pat as they feel little pressure to begin cutting rates,” Daniel Zhao, a lead economist at Glassdoor, said after the release of the data.
Traders of futures contracts that settle to the Fed’s policy rate reacted by slashing the price-implied probability of a first quarter-of-a-percentage-point rate cut by the Fed’s April 30-May 1 meeting to about 70%, from about 90% earlier on Friday.
Traders also pared expectations for the total depth of rate cuts in 2024, and now see the Fed more likely to end the year with the policy rate at 4.00%-4.25%. They had previously seen that rate ending 2024 at below 4%.
(Reporting by Ann Saphir; Editing by Hugh Lawson and Paul Simao)