The weak May NFPs report is push the Fed closer to cutting interest rates soon if not sooner.
While a reduction when policy makers meets later this month cannot be ruled out, Fed watchers said their base case is for the FOMC to stand pat. But they said the abrupt slowdown in payrolls growth last month against the backdrop of President Trump’s escalating dispute with major US trading partners does increase odds the Fed will cut rates perhaps as soon as July.
Payrolls rose 75,000 in May after a downwardly revised 224,000 advance the prior month, according to a Labor Department report Friday. The increase missed all estimates in our survey calling for an increase of 185,000 and follows other softer readings on the economy.
JPMorgan Chase & Co. chief US economist said, “I doubt they go in June, but I would not put a Zero probability on it.”
His base case is for 2 Quarter-point rate cuts this year, in September and December. But “it could be sooner than September and it could be more than 50 bpts, depending on what happens to the economy.
The federal funds futures market shows a Quarter-point cut almost fully priced in for July, and indicate about 70 bpts of easing by the end of Y 2019.
Fed Chairman Powell and his colleagues meet on 18-19 June to map monetary strategy. Chairman Powell opened the way to a possible rate cut early last week when he said the Fed “will act as appropriate to sustain the expansion.’’
The weak jobs report comes after a string of soft economic data. Retail sales, factory output and home purchases have shown the economy struggling this quarter after better-than-expected growth in the 1st 3 months of the year.
“The risks of Fed rate cuts have clearly increased,” Goldman Sachs Group Inc. Chief Economist and his team said in a Friday note to clients
Bank of America economists said the jobs report supports their view that Fed will reduce rates in September and December.
“We continue to believe it is too early to move in June as the Fed will likely want to see further evidence of weakness before easing,’’ they wrote in a Friday note to clients.
Policy makers may also want to wait until after leaders of the G-20 nations meet at the end of this month so as to get a clearer picture of where the US disputes with China and Mexico are heading, the Bank of America economists said.
“That said, the Fed will likely send a very Dovish message at the June meeting,’’ they wrote, adding that the employment report “clearly puts July in play for a cut.’’
Have a terrific week