What will the Fed do after hotter-than-expected jobs report?

The U.S. job market is still hot. The NFP report, released on Friday, showed the addition of 272,000 jobs in May, crushing analyst estimates.

Such a divergence from the consensus is likely have a substantial effect on the Federal Reserve. This surge suggests sustained momentum in the labor market. 

As a result, the central bank, which has been closely monitoring employment figures, may see the strong job growth as a reason to hold off on initiating rate cuts.

The rise in the unemployment rate to 4.0% may seem counterintuitive given the substantial job gains, yet it is a nuanced indicator that could reflect changes in labor force participation or other demographic shifts within the U.S. economy.

What economists are saying about the NFP report

Bank of America: "The bottom line is that the stronger-than-expected May employment report remains consistent with our monetary policy outlook for staying on hold. This report showed solid payroll gains with positive implications for consumer spending."

"We expect the Fed to stay on hold for now and start a gradual cutting cycle in December which will depend on a moderation in the inflation data. The economy may be cooling, but it is not cool."

TD Securities: "The FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50%, with Chair Powell likely providing a similar policy message to May."

"However, the risk is that the chairman appears somewhat optimistic given the recent evolution of the US consumer, and if the May CPI report shows further inflation progress. We also look for the dot plot to show two cuts as the median for 2024 and four for 2025."

Evercore ISI: "Within broad ranges, the inflation data not the jobs data will determine whether the Fed cuts in September or not."

Investec: "Our base case is for a September start to easing, with the Fed moving policy rates gradually lower from there. The actual decision at next week’s meeting is unlikely to throw too many surprises, but we will be hunting for clues as to whether our idea of where rates are heading matches that of the Fed’s."

Jefferies: "Bottom line is that the Fed is still firmly on hold. Next week's CPI is likely to print +0.1%/+0.3%, and we see some upside for a +0.2% on the headline. A July cut is also likely a pipe dream, and it's unlikely that things will fall apart quickly enough before September for a cut as well."

"We continue to expect 1 cut in 2024, likely in November or December depending on how the Fed handles the election results."

UBS: "This report seems likely to continue to bolster FOMC participants' assessments of the expansion's resilience. It also puts at risk our expectation that the June SEP has a 2 cut dot median for 2024. However, there are a other reasons for the FOMC retaining the option of a September rate cut and keeping market pricing between one and two cuts while they await more data."

Citi: "We are shifting our base case for a first rate cut from July to September on well-above-consensus 272k new jobs in May. We now expect 75bp of total cuts this year in September, November and December."

"But the jobs report does not change our view that hiring demand, and the broader economy, is slowing and that this will ultimately provoke the Fed to react with a series of cuts beginning in the next few months."