Strong jobs report leads market to abandon expectations of interest rate cuts.

• The jobs report on Friday indicates that the labor market is healthy, which supports the notion that the Fed has no need to act quickly in lowering interest rates.
• The FOMC's meeting next week and on July 30-31 are unlikely to see a reduction in fed funds rates, according to pricing in fed funds futures.

The surprising pace of job growth and rising wages have increased the likelihood that the Federal Reserve will maintain its hold on interest rates this summer and potentially beyond.

The Bureau of Labor Statistics reported that nonfarm payrolls increased by 272,000 for the month, exceeding the Wall Street consensus of 190,000 and surpassing April's gain of 165,000. Additionally, average hourly earnings rose 4.1% over the past 12 months, which was more than anticipated.

The data suggests that the Fed doesn't need to act quickly to lower interest rates, as inflation is above the target and there is little evidence that higher rates are hurting economic growth.

"Liz Ann Sonders, chief investment strategist at Charles Schwab, expressed confusion about when the Fed will start cutting, stating that neither component of the Fed's dual mandate indicates the need to do so, and higher-for-longer means nothing could happen this year."

The Fed's mandate requires both full employment and stable prices to be maintained.

Despite the rising unemployment rate of 4% in May, the labor market remains vibrant. On the other hand, inflation is still running above the Fed's target, with most gauges showing annual price increases of about 3%, although this is down from the mid-2022 peaks, but still running hot.

Lowering expectations

Following the jobs numbers, futures traders cut bets on rate cuts.

The FedWatch measure from the CME Group indicates that there is a 54% probability of a September move and a just over 50% chance that the Fed will follow up with a second cut before the end of the year, based on pricing in fed funds futures.

All of those probabilities were down sharply from Thursday levels.

Despite the report indicating that job openings are decelerating, Rick Rieder, chief investment officer of global fixed income for BlackRock, advised investors not to get overly pessimistic.

The unemployment rate, calculated using a household survey, decreased by 408,000, while part-time employment continued to grow at a faster rate than full-time positions.

"Rieder stated in a post-report analysis that the Federal Reserve's mandate of price stability and full employment is balanced when these conditions are met. As a result, the Fed can lower the Fed Funds rate from a very restrictive position to a merely restrictive one."

The Committee may begin reducing the policy rate by 25 basis points at its September meeting, with the aim of achieving another cut this year, but inflation readings must support this decision.

Citigroup, previously above-consensus on Wall Street, now expects the Fed to not move until September and then continue to cut rates from that point.

Andrew Hollenhorst, a Citigroup economist, wrote that the jobs report does not alter their view that hiring demand and the broader economy are slowing, which will prompt the Fed to respond with a series of cuts in the near future.