Jobs Report and FOMC update
Nonfarm payrolls increased by 253,000 in April and the unemployment rate ticked lower to 3.4%. The deceleration in the pace of job growth continues. Since the monthly jobs figure can be volatile, we prefer to look at the 3-month moving average (3MMA) of job gains. Over the past year, the 3MMA has decelerated from 524,000 in April 2022 to 222,000 in April 2023. This month’s 222,000 figure is the lowest 3-month average since January 2021. Regardless, monthly payroll gains over 200,000 indicate a very healthy labor market and exceed the pace the Fed Chair Powell is hoping to achieve as he attempts to bring the labor market into balance. The February and March jobs figures were revised lower -78,000 and -71,000 respectively for a total adjustment of -149,000 versus previously reported figures.
The 3.4% unemployment rate matches the lowest level in more than 50 years. The unemployment rate has been remarkably stable over the past 14 months oscillating between 3.4% and 3.8%, near the lowest levels on record. This is yet another sign the labor market remains very healthy.
On Wednesday May 3 the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target rate 25 basis points to a target range of 5.00% to 5.25%. This matched our expectation for a quarter-point rate hike. In the post-meeting statement, FOMC members noted that recent turmoil in regional banks “are likely to weigh on economic activity, hiring, and inflation.”
The FOMC is now firmly in a data-dependent mode and will adjust the fed funds rate accordingly:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
Source: Federal Reserve
Following the May FOMC meeting, Chair Powell hosted a press conference and answered questions.
Below is a chart of the Fed Funds rate (effective fed funds = 5.08%) versus our modified version of the Taylor Rule recommended policy rate. The Taylor Rule can provide hints regarding whether the next change in the fed funds rate will be higher or lower at turning points in the economic cycle.
The final chart (below) in today’s update shows the nominal fed funds rate on top and the *real* fed funds rate below. The *real* rate removes the most recent year-over-year core PCE inflation rate. You can see that *real* rates are finally back in positive territory, which was one of the Fed’s key objectives as they tightened monetary policy.
The May rate hike could be the last rate hike of this cycle, if the inflation and jobs data continue to decelerate. We will know more as the incoming data is reported. If the inflation data ticks higher, we cannot rule out another rate increase.