In a surprising turn of events, American employers ramped up hiring in May, defying expectations and adding to the list of factors the Federal Reserve will consider in its upcoming rate decision. The latest report from the Bureau of Labor Statistics, a division of the U.S. Department of Labor, revealed that the nation's economy saw an impressive gain of 339,000 jobs last month. This figure marks a significant rise from the revised April reading of 294,000 jobs, surpassing economists' predictions, which had anticipated an increase of 180,000.
However, alongside the positive news, the unemployment rate saw a marginal increase, ticking up to 3.7% in May compared to 3.4% in April. Additionally, while average hourly earnings experienced a slight growth of 0.3% in May, the pace slowed down from the 0.4% rise observed the previous month. On an annual basis, wage growth showed a mild deceleration, settling at 4.3%.
As the Federal Reserve gears up for its two-day gathering commencing on June 13, these job market indicators will undoubtedly shape their decision-making process. The central bank remains divided on whether to halt the current campaign of tightening policies that has been in effect for over a year or to proceed with another round of borrowing cost increases, aimed at curbing rising inflation.
The ongoing strength of the labor market has played a pivotal role in the Fed's previous ten consecutive rate hikes. In theory, a slowdown in labor demand could contribute to a decrease in inflationary pressures, primarily by alleviating wage growth.
Following the release of the job report, the probability of a quarter percentage point rate hike by the Fed saw a marginal increase, as indicated by CME Group's FedWatch Tool. However, market investors widely anticipate that the central bank will opt for a pause in the rate increases.
While analysts at ING believe that a pause is the most likely outcome, they caution that a stronger-than-expected consumer price index in May could sway the decision in favor of continuing the tightening cycle.
