The US jobs market looks to be weakening, but that will not force the Fed to lower borrowing rates in the near future.
With inflation still significantly above the 2% target, strategists have turned to the labor market as the possible impetus for the Federal Reserve to become comfortable with cutting its benchmark rate, which has remained at a decadeslong high since July.
After the Fed's meeting May 1, Chairman Jerome Powell told reporters that without a substantial decline in inflation, only an "unexpected weakening," would be enough to trigger rate cuts.
"It would have to be meaningful and get our attention and lead us to think that the labor market was really significantly weakening for us to want to react to it," Powell said.
The April jobs report, released on May 3, showed that the historically hot domestic jobs market was cooling somewhat, with job growth slowing by nearly half from March and wages climbing by the lowest rate since May 2021. While moving in a direction potentially ripe for rate cuts, the slowdown is not enough to warrant action from the Fed.
"This report is softer than expected, but it isn't a terrible report and certainly wouldn't qualify as unexpected weakening," said James Knightley, chief international economist with ING.
The latest jobs report showed 175,000 jobs created in April, down from 315,000 in March. Through the first four months of 2024 there have been 982,000 jobs created, compared to nearly 1.2 million over the same stretch of 2023.
Job growth was again imbalanced with 95,000 positions, or more than half of all new jobs in April, in private education and health services. Nearly 30% of the jobs created in March were in private education and health services.
In order for the Fed to view the job market as weakening, monthly job creation would need to fall substantially further, possibly to just 50,000 jobs created per month or even outright losses, said Josh Jamner, an investment strategy analyst at ClearBridge.
The Fed would likely not move without a relatively large rise in the unemployment rate, which has been below 4% since February 2022. In their latest economic projections, released in March, Fed officials forecast the unemployment rate averaging 4% in 2024 and only ticking up to 4.1% in 2025.
"Some weakness in the labor market shouldn't be 'unexpected,' so in our view a more material batch of weaker data would likely be needed," Jamner said.
The overall employment rate rose to 3.9% in April from 3.8% in March and has averaged 3.8% through the first four months of this year, up from 3.5% over the first four months of 2023.
In order for the Fed to cut rates due to the jobs market, there would need to be a "notable" increase in the unemployment rate, likely enough to trigger the Sahm Rule, said Gregory Daco, chief economist at EY-Parthenon. The Sahm Rule signals a recession is imminent when the three-month unemployment rate moving average rises by 50 basis points or more relative to its low during the previous 12 months.