With job market far from crumbling, Fed to stay on hold

Reuters

3 days ago

July 3 (Reuters) - A U.S. job market that looks far from collapse despite some strain from higher tariffs and the Trump administration's immigration crackdown is adding to the case for the Federal Reserve to keep short-term borrowing costs where they are for longer.
The Labor Department's monthly jobs report on Thursday showed U.S. nonfarm payrolls increased by a bigger-than-expected 147,000 in June and the unemployment rate unexpectedly edged down to 4.1%. A separate report showed initial claims for unemployment insurance dropped.
The data decisively closed the door on a July Fed rate cut that had been opened in recent weeks by Fed Governor Christopher Waller and Fed Vice Chair of Supervision Michelle Bowman, who had called for early action to head off labor market deterioration.
"Today's data of higher than expected payrolls, a drop in the unemployment rate, and a fall in jobless claims completely dispels their case for imminent rate cuts and implies that there is absolutely no urgency for Fed support," said Seemah Shah, chief global strategist at Principal Asset Management. "We expect the first cut to come in late 2025."
The Fed last month left its benchmark overnight interest rate in the 4.25%-4.50% range, where it has been since December. The decision has drawn fury from President Donald Trump, who feels that with inflation cooling the central bank should be sharply reducing its policy rate.
Fed Chair Jerome Powell on Tuesday to "wait and learn more" about how much tariffs push up on inflation before lowering rates again.
Rate futures show traders are back on board with that vision, with financial market bets pointing to a September start to rate cuts and a total of just two quarter-point reductions by yearend, not the three rate cuts that they had earlier favored.
Thursday's data continued to show the labor market is indeed cooling.
Average earnings rose 3.7% in June, coming further into line with what Fed policymakers feel is consistent with their 2% inflation goal.
Broadly the report contained plenty of evidence that the Trump administration's trade and other policy changes are reshaping the job market. Manufacturing jobs fell by 7,000, and federal government payrolls also slipped.
Restrictions on immigration and the administration's push for deportations also look to be reducing the share of foreign-born workers in the job market.
In a poor sign for the outlook, hiring was concentrated in an increasingly narrow range of job types.
And labor force participation continued to fall in June, dropping a tenth of a percentage point to 62.3%, after falling two tenths of a percentage point in May.
Without that decline, the unemployment rate would have risen sharply to 4.7%, wrote Nationwide's Kathy Bostjancic, who attributed the job market exits to potential workers becoming too discouraged to look for jobs, or to reductions in immigration.
"In our assessment, the weak employment report supports our view that the Fed will cut the fed funds rate by 75bps by year-end to bolster a slowing economy despite a likely temporary run-up in prices stemming from tariffs," she wrote.
A separate report Thursday from the Institute for Supply Management showed the U.S. services sector picked up in June, though employment contracted, with businesses hesitant to fill jobs, highlighting the economic drag from policy uncertainty.