June payrolls slow after strong spring
A cooler U.S. employment report for June is unlikely to shift the Federal Reserve away from its focus on inflation, even though hiring slowed sharply after three stronger months.
The U.S. economy added 57,000 jobs in June, below expectations for 113,000 and well under the prior month’s pace.
The unemployment rate edged down to 4.2%, compared with 4.3% in May and expectations that it would remain unchanged.
Earlier job gains revised lower
The Labor Department also revised down the payroll gains reported for April and May.
April’s figure was lowered by 31,000 to 148,000 jobs, while May’s total was reduced by 43,000 to 129,000.
Average monthly job growth over the past three months now stands at about 111,000.
Labor market still seen as stable
Despite the weaker June number, the recent pace of hiring remains stronger than the scenario discussed by some Fed officials earlier this year, when they suggested that even zero job growth could still be consistent with a balanced labor market.
Jeffrey Roach, chief economist for LPL Financial, said he is watching signs that more people are leaving the labor force altogether.
The labor force participation rate fell 0.3 percentage points to 61.5%.
Roach said the labor market is still holding up, which gives the Fed room to keep its attention on price stability.
Fed may view report as normalizing
Krishna Guha, head of economics and central banking strategy at Evercore ISI, said the June report is more likely to be interpreted by the Fed as a return to normal than as a genuinely weak reading.
Guha said the Fed under Chair Kevin Warsh is focused first on inflation and does not see a mechanical link between labor market strength and price pressures.
As a result, he expects the employment report to have limited impact on the rate outlook, which will depend more directly on inflation developments.
Markets still expect a pause
Markets are pricing in an 80% chance that the Fed keeps interest rates unchanged at its meeting later this month, according to the CME FedWatch tool.
The probability of a rate hike in September or October fell to 46%, down from 50% before the jobs report.
The data therefore reinforced expectations for an extended pause, while still leaving room for hawkish officials to argue for possible hikes later this year.
Daly says one report will not change the view
Speaking earlier Thursday in Spain, before the jobs report was released, San Francisco Fed President Mary Daly described the labor market as stable.
She indicated that a single report would not be enough to overturn that assessment.
Warsh remains optimistic on jobs
Fed Chairman Kevin Warsh said Wednesday that the labor market remains “steady.”
He also downplayed concerns that artificial intelligence will destroy employment, arguing that technological change can ultimately create more jobs and prosperity.
At a central banking forum in Portugal, Warsh rejected the view that automation reduces the total amount of work available, calling it the “lump of labor fallacy.”
He said the economy is still in the early stages of the current technological shift and made clear that he is not pessimistic about AI.
Inflation remains the main policy concern
While Warsh sounded constructive on employment, he remained firm on the Fed’s price stability mandate.
He said inflation is still too high and repeated that monetary policy must stay restrictive until inflation returns to the central bank’s 2% target.
Warsh said anyone expecting the Fed to accept inflation above 2% would be “disappointed.”
He added that the central bank intends to deliver price stability in the United States.
Core inflation moves higher
The Fed’s preferred inflation measure, the Personal Consumption Expenditures index excluding volatile food and energy prices, rose to 3.4% in May.
That marked its highest level since October 2023.
Fed officials now expect headline inflation to reach 3.6% this year, up from their previous projection of 2.7%.
On a core basis, officials see inflation at 3.3%, also higher than the earlier forecast of 2.7%.
Jobs report released before July 4 holiday
The Labor Department published the monthly employment report one day earlier than usual.
Markets and federal offices will be closed Friday for the July 4 holiday.
