Economics
Wall Street is confused and divided over how many times the Fed will cut rates this year
Published
2 weeks agoon
Wall Street reacted Thursday to this week’s Fed meeting, with forecasts scattered across a range of outcomes for where monetary policy heads next. Most economists for the biggest forecasting firms expect the central bank to lower benchmark interest rates sometime later this year. But the outlooks ranged from one cut to four, with most saying that only time will really tell how much the rate-setting Federal Open Market Committee can take its foot off the brake. “The May FOMC meeting was mostly uneventful but dovish overall,” Goldman Sachs economist David Mericle said in a client note that underscored the uncertainty following this week’s meeting. “While the Committee added a hawkish acknowledgment of the ‘lack of further progress’ on inflation so far this year to its statement, Chair Powell offered a dovish message in his press conference.” The result of the conflicting signals? Goldman left in place its call for two rate cuts this year of a quarter percentage point each, with one in July and the other in November. However, the firm noted that “even moderate upside surprises” on inflation could thwart that outlook and “delay cuts further.” Indeed, there was considerable uncertainty on the Street over the extent and timing of cuts. Futures market traders on Thursday continued to price in the likelihood of just one reduction this year and even about a 15% chance of a hike, according to CME Group data . Here’s a quick look at where the major firms lined up: Citigroup is an outlier in how many cuts it sees coming, though its reasoning for easier policy ahead doesn’t differ that sharply from other firms. Essentially, most economists believe the Fed is correct that inflation metrics will show more easing through the year and get the central bank closer to its 2% annual goal. The issue is how much convincing that cautious policymakers will need and how quickly they’re willing to make a move without showing that they are vacillating on their commitment to stable prices. “Powell’s comments were consistent with our view that the Fed will proceed to lower rates as soon as either core inflation data softens or labor market data weakens,” Citigroup economist Andrew Hollenhorst wrote. Lower inflation numbers along with “a sharper deterioration” in the jobs outlook will lead the Fed to start cutting in July and keep going until it has lowered its fed funds benchmark by a full percentage point before the end of the year, he added. At Morgan Stanley, the firm’s chief U.S. economist, Ellen Zentner, was nearly as certain about rate cuts to start in July, though the inflation trends so far in 2024 “have narrowed the path to get there.” “Despite the lack of further progress in slack this year (in terms of both inflation and the labor market), the Committee has made meaningful progress toward its 2% goal over the past year,” she wrote. “We continue to see inflation moving lower, unemployment higher, and three cuts this year.” As for more consensus calls, Barclays thinks a September cut “at the soonest” with the prospects very much alive that the Fed will choose a harder line if the first-quarter inflation data is a harbinger of things to come. Marc Giannoni, chief U.S. economist at Barclays, noted that Powell, while indicating a hike is likely not in the cards , also did not repeat his recently stated expectations that rates would be lowered sometime this year. “If inflation comes in stronger than in our baseline, we would expect the first rate cut to be postponed to December,” he wrote. “We view this as almost as likely as our baseline scenario. For 2025, we continue to expect four rate cuts.” And Bank of America said the Fed is likely to stay on hold while it waits for more convincing evidence on inflation. “The Fed has shifted to a wait-and-see mode and is prepared to keep its policy rate where it is for as long as needed,” BofA economist Michael Gapen said. “Needing more time means later cuts.” — CNBC’s Michael Bloom contributed to this report.
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Here’s what to expect from the April jobs report on Friday
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The U.S. economy added fewer jobs than expected in April while the unemployment rate rose, lifting hopes that the Federal Reserve will be able to cut interest rates in the coming months.
Nonfarm payrolls increased by 175,000 on the month, below the 240,000 estimate from the Dow Jones consensus, the Labor Department’s Bureau of Labor Statistics reported Friday. The unemployment rate ticked higher to 3.9% against expectations it would hold steady at 3.8%.
Average hourly earnings rose 0.2% from the previous month and 3.9% from a year ago, both below consensus estimates and an encouraging sign for inflation.
The jobless rate tied for the highest level since January 2022. A more encompassing rate that includes discouraged workers and those holding part-time jobs for economic reasons also edged up, to 7.4%, its highest level since November 2021. The labor force participation rate, or those actively looking for work, was unchanged at 62.7%.
Wall Street already had been poised for a higher open, and futures tied to major stock market averages added to gains following the report. Treasury yields tumbled after being little changed before the release. The report raised the prospect of a “Goldilocks” climate where growth continues but not at such a rapid pace to force the Fed to tighten policy further.
“With this report, the porridge was just about right,” said Dan North, senior economist at Allianz Trade. “What would you like at this point the cycle? We’ve had interest rates jacked up pretty high, so you would expect to see the labor market slow down a little. But we’re still at pretty high levels.”
Consistent with recent trends, health care led job creation, with a 56,000 increase.
Other sectors showing significant rises included social assistance (31,000), transportation and warehousing (22,000), and retail (20,000). Construction added 9,000 positions while government, which had shown solid gains in recent months, was up just 8,000 after averaging 55,000 over the previous 12 months.
Revisions to previous months took the March gain to 315,000, or 12,000 from the initial estimate, and February to 236,000, a decline of 34,000.
Household employment, which is used to calculate the unemployment rate, increased by just 25,000 on the month. Workers holding full-time jobs soared by 949,000 on the month, while those hold part-time jobs slumped by 914,000.
The report comes two days after the Fed again voted to hold borrowing costs steady, keeping its benchmark overnight borrowing rate in a targeted range between 5.25%-5.5%, the highest in more than 20 years.
Following the decision, Chair Jerome Powell characterized the jobs market as “strong” but noted that inflation is “too high” and this year’s economic data has indicated “a lack of further progress” in getting inflation back to the Fed’s 2% target.
But market action shifted after the jobs report indicated an easing labor market and softer wage increases. Traders priced in a strong chance of two interest rate cuts by the end of 2024, with the first reduction expected to come in September, according to CME Group data.
“This is the jobs report the Fed would have scripted,” said Seema Shah, chief global strategist at Principal Asset Management. “The first downside payrolls surprise in several months, as well as the dip in average hourly earnings growth, will bring the rate cutting dialogue back into the market and perhaps explains why Powell was able to be dovish on Wednesday.”
Though inflation has come well off its highs in mid-2022, it is still considerably above the central bank’s comfort zone. Most reports this year have shown inflation around 3% annually; the Fed’s own preferred measure, the core personal consumption expenditures price index, most recently was at 2.8%.
Higher prices have been putting upward pressure on wages, part of an inflation picture that has kept the Fed on the sidelines despite widespread market expectations that the central bank would be cutting interest rates aggressively this year.
Most Fed officials in fact had been mentioning the likelihood of reductions in their public comments. However, Powell at his post-meeting news conference Wednesday made no mention of the likelihood that rates would be lowered at some point this year, as he had in the past.
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Economics
Immigrant workers are helping boost the U.S. labor market
Published
2 weeks agoon
May 4, 2024The strong jobs market has been bolstered post-pandemic by strength in the immigrant workforce in America. And as Americans age out of the labor force and birth rates remain low, economists and the Federal Reserve are touting the importance of immigrant workers for overall future economic growth.
Immigrant workers made up 18.6% of the workforce last year, a new record, according to Bureau of Labor Statistics data. Workers are taking open positions in agriculture, technology and health care, fields where labor supply has been a challenge for those looking to hire.
Despite the U.S. adding fewer-than-expected jobs in April, the labor force participation rate for foreign-born workers ticked up slightly, to 66%.
“We don’t have enough workers participating in the labor force and our birth rate has dropped down 2% last year from 2022 to 2023. … These folks are not taking jobs. They are helping to bolster and helping us build back — they’re adding needed workers to the labor force,” said Jennie Murray, CEO of the National Immigration Forum, a nonpartisan nonprofit advocacy organization.
The influx of immigrant workers is also a projected boost to U.S. output, and is expected to grow gross domestic product over the next decade by $7 trillion, Congressional Budget Office Director Phillip Swagel noted in a February statement accompanying the 2024-2034 CBO outlook.
“The labor force in 2033 is larger by 5.2 million people, mostly because of higher net immigration. As a result of those changes in the labor force, we estimate that, from 2023 to 2034, GDP will be greater by about $7 trillion and revenues will be greater by about $1 trillion than they would have been otherwise. We are continuing to assess the implications of immigration for revenues and spending,” Swagel wrote.
‘Huge competition’
Goodwin Living, a nonprofit faith-based elder-care facility in Northern Virginia that cares for 2,500 adults day to day, is heavily reliant on immigrant workers. Some 40% of its 1,200 workers are foreign-born, representing 65 countries, according to CEO Rob Liebreich, and more workers will be needed to fill increasing gaps as Americans age and need assistance.
“About 70% of 65-year-olds are expected to need long-term care in the future. We need a lot of hands to support those needs,” Liebreich told CNBC. “Right now, one of the best ways that we see to find that is through people coming from other countries, our global talent, and there’s a huge competition for them.”
In 2018, Goodwin launched a citizenship program, which provides financial resources, mentorship and tutoring for workers looking to obtain U.S. citizenship. So far, 160 workers and 25 of their family members have either obtained citizenship or are in the process of doing so through Goodwin.
Wilner Vialer, 35, began working at Goodwin four years ago and serves as an environmental services team lead, setting up and cleaning rooms. Vialer, who came to the U.S. 13 years ago from Haiti, lost his job during the pandemic and was given an opportunity at Goodwin because his mother had been employed at the facility.
He applied for U.S. citizenship before getting his current job, but after he worked there for six months, the Goodwin Living Foundation covered his application fee of $725, the nonprofit said. Vialer became a U.S. citizen in 2021, and his 15-year-old daughter received a citizenship grant and became a U.S. citizen in 2023.
Vialer’s hope is to have his wife join the family from Haiti, as they have been separated for six years.
“This program is a good opportunity,” Vialer said. “They help me, I have a family back home. … This job really [does] support me when I get my paycheck to help them back home.”
Workers are not required to stay with Goodwin after becoming U.S. citizens, but those who do stay are there 20% longer than those who do not participate in the program, Liebreich said. Speeding up the path to citizenship is key to remaining competitive in a global economy, he added.
“If we want to attract and retain this global workforce, which we desperately need, we need to make the process a lot easier,” Liebreich said.
Looking ahead to November, immigration will be a hot topic on the presidential campaign trail and for voters. Both President Joe Biden and former President Donald Trump have made trips to the southern border in recent months to address the large number of migrants entering the country.