The US Federal Reserve is likely done raising interest rates, traders bet after a government report showed the unemployment rate rose last month and wage growth cooled.
Futures that settle to the Fed’s policy rate had already priced in only a slight chance of a rate hike this month. They now reflect the chance of US central bankers tightening policy any further this year dropping to about 38 percent from about a 45 percent chance seen before the latest jobs report.
That Labor Department report showed the unemployment rate jumped to 3.8 percent last month, from 3.5 percent previously, and average hourly earnings rose 4.3 percent from a year earlier, compared with 4.4 percent in July. Employers added 187,000 workers to their payrolls last month, more than they did in July, though revisions showed job growth in the prior months was not as strong as first reported.
“This report is likely to put the Fed on hold in September, and if we get more positive inflation news in September and October, the Fed is likely done, and we’ve seen the end of the rate hikes,” said Peter Cardillo, chief market economist at Spartan Capital Securities.
The Fed raised short-term borrowing costs aggressively starting in March 2022 to fight 40-year-high inflation, most recently in July when it increased its target range for the benchmark rate to 5.25 percent -5.50 percent .
Inflation has eased from its peak of 7 percent last summer to 3.3 percent last month, based on the Fed’s preferred inflation measure, but policymakers say it is still too high and have been looking for the labor market to soften somewhat to keep downward pressure on prices. The Fed targets 2 percent inflation.
Cleveland Fed President Loretta Mester, one of the central bank’s more hawkish policymakers, signaled she may need more convincing on whether the rate hikes have indeed gone far enough.
She said last week she believes the Fed needs to notch rates up a bit farther, a view that as of June most of her colleagues also embraced.
“In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong,” she told a European Central Bank conference shortly after the latest jobs report.
Traders currently see the Fed likely on hold through April 2024, with rate cuts to start in May.
The full impact of the US Federal Reserve’s interest rate hikes that began in March 2022 has still not been completely transmitted to the real economy, a former vice chairman of the central bank said.
The Fed has cumulatively raised its target rate by 525 basis points to 5.25 percent -5.50 percent over the last 17 months. – Reuters
