The Federal Reserve's debate shifted Friday from how much to cut interest rates later this month to whether to move at all after hiring in June surpassed the expectations of economists.
Yields on two-year U.S. Treasuries jumped to 1.87% from 1.76% the day before, reflecting reduced odds of the Fed aggressively reducing borrowing costs in the near term. Fed funds futures, which had been indicating some possibility of a half-point rate cut in July before the Labor Department's data, are now pricing a quarter-point reduction this month, and at one point on Friday even showed that outcome was less than 100% certain.
Fed Chairman Jerome Powell, who has said uncertainties in the U.S. outlook could call for lower rates, will give his read on the job market next week in two days of semiannual testimony before Congress. The Federal Open Market Committee on July 30-31 will discuss whether the economy needs an "insurance cut" amid a slowing global economy, trade frictions and low inflation.
Officials will also take pains to stress that they're not responding to political pressure. Despite what he termed "great jobs numbers," President Donald Trump on Friday repeated his call for the Fed to cut interest rates, saying it would make growth "be like a rocket ship."
"It is going to be a pretty well-debated meeting," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who said a half-point cut is now off the table.
Payrolls climbed 224,000, compared with the median economist estimate for 160,000, after a relatively weak 72,000 advance the prior month, according to the Labor Department figures. The jobless rate ticked up to 3.7% from a half-century low of 3.6% while average hourly earnings increased 3.1% from a year earlier, slightly less than projected.
In a report after the employment release, Goldman Sachs Group Inc. economists led by Jan Hatzius said recent Fed speeches and interviews suggest the central bank will go ahead with a cut in July.
"We continue to see rate cuts as the most likely outcome," with 60% odds of a July quarter-point cut, 15% odds of a half-point reduction and 25% odds of no policy change.
The Fed separately on Friday issued its semiannual monetary-policy report to Congress ahead of Powell's testimony, which begins Wednesday. The report repeated wording from the June Federal Open Market Committee statement saying officials would closely monitor incoming data and "act as appropriate to sustain the expansion."
"The July meeting is probably a closer call than what the markets are implying," said Neil Dutta, head of economics at Renaissance Macro Research. "If you were thinking they would cut rates three times this year, the momentum is so strong in July that that is not going to happen."
There has been growing sentiment on the part of Fed officials that a rate cut might be needed this year. Eight of 17 penciled in a reduction by the end of the year in the June "dot plot," which shows quarterly forecasts for the central bank's benchmark rate.
"The rebound in job growth in June likely takes a 50-basis-point cut off the table," said Ryan Sweet, head of monetary-policy research at Moody's Analytics Inc. "I still think the odds of a cut are around 65%," which would be intended as insurance against a slowdown, boost inflation expectations and "signal the Fed isn't going to kill this expansion."
The Fed pushed its key policy rate up four times in 2018, angering Trump, who blamed the rate hikes for slowing economic growth and depressing the stock market. The Fed's benchmark rate currently stands in a range of 2.25% to 2.5%.
In the monetary report, the Fed noted that views of Fed officials about the economic outlook had changed beginning in May as global growth slowed and U.S. businesses and farmers began to express "heightened concerns" about rising trade tensions.
In early May, Trump increased penalty tariffs on $250 billion in Chinese goods and threatened to broaden the tariffs to $300 billion in other Chinese imports after trade talks between the world's two biggest economies stalled.
Trump last week declared a ceasefire in his trade war with China after a meeting with Chinese President Xi Jinping at the Group of 20 summit in Japan. Both countries agreed to resume negotiations to reach a deal to satisfy American demands for better protection of American technology.
Earlier this week, he announced his intention to fill two remaining vacancies on the seven-member Fed board with economists Judy Shelton, who had served as a Trump economic advisor, and Christopher Waller, currently the research director at the Fed's St. Louis regional bank.
If confirmed by the Senate, both officials are expected to support Trump's call for the Fed to cut interest rates.
Information for this article was contributed by Steve Matthews and Katia Dmitrieva of Bloomberg News; and by Martin Crutsinger of The Associated Press.
Business on 07/06/2019
Print Headline: Experts iffy on Fed cutting rates soon