Blockbuster New Jobs And Unlikely March Rate Cut – Is The Last Mile The Longest?

Weekly Economic Review: Feb. 5, 2024

On Friday, Feb. 2, the Federal reserve delivered what the markets expected, keeping the fed funds rate unchanged.  Dashing any remaining market expectations for a rate cut at the March meeting, Chair Powell indicated that the Fed is not ready to lower rates anytime soon, that its decision making remains data-dependent, and that it may lower rates earlier only if there is an unexpected weakening in employment.  Let’s examine the employment data that contributed to the Fed’s recent decisions.

On Tuesday, Jan. 30, the Bureau of Labor Statistics (BLS) released its Job Openings and Labor Turnover Survey (JOLTS) results for December.  The number of job openings increased slightly, by 101,000, to 9 million on a sequential basis, meaning that demand for workers remains resilient. In contrast, the market expected a decline to 8.75 million in December. The December number represents 1.44 positions for every unemployed person, which while robust is significantly lower than the 2 open positions per unemployed person that existed in March 2022, when the Fed started increasing interest rates.  So, while the Fed’s higher rates have caused a modest softening in the labor market, overall it remains quite strong.

At the same time, the number of people who voluntarily quit their jobs fell 132,000, to 3.4 million, in December, the lowest level since January 2021. The relatively low quits rate shows that workers are less confident of their ability to find new jobs that are better paid. These numbers are consistent with the JOLTS results, which showed a strong but slowing labor market.  This is a positive sign for slower wage inflation and price pressures in the economy.

Also on that Tuesday, the Conference Board reported that consumer confidence went up in January to its highest level since the end of 2021.  This reflects consumer expectations for slower inflation, lower interest rates, and generally positive employment conditions.  The rise in confidence should keep consumer spending, and hence the overall economy, resilient for a time.

Then on Wednesday, Jan. 31, the Bureau of Labor Statistics (BLS) announced the employment cost index (ECI), measuring the total compensation (wages and benefits) of employees, for the fourth quarter of 2023.  This is the Fed’s preferred wage measure (over average hourly earnings numbers from the monthly jobs report), as the ECI is free from the effects of workers moving between different occupations and industries.  In the fourth quarter the ECI had its smallest increase in two years, which is consistent with a strong but slowing labor market and easing inflationary pressures.  Annual compensation cost increased 4.2% year-over-year, which is higher than the years before the pandemic. However, if labor productivity continues its recent trajectory of the third and fourth quarters of 2023 (i.e., 2.3% in Q3 and 2.7% in Q4), compensation growth net of productivity gains would be in line with the Fed’s target.

Which brings us to the conclusion of the Federal Reserve’s two-day FMOC meeting at which it decided to keep interest rates unchanged, as expected.  This was the fourth consecutive time that the Fed elected to maintain a steady monetary policy. Chair Powell indicated the following during his press conference: 1) a March rate cut is unlikely, 2) the Fed is focusing on its dual mandates of inflation and employment, not economic growth, but that the economy has strengthened as inflation has come down without an increase in unemployment, 3) rate cuts would come once the Fed has greater confidence that inflation will continue to decline sustainably to its 2% target from the current elevated level, 4) the current Fed Funds rate is likely at its peak for this tightening cycle, 5) if the Fed sees an unexpected weakening in employment growth, it could move rates down earlier, and 6) the Fed plans to begin in-depth discussions on slowing its balance sheet runoff (i.e., shifting its focus towards a declining-rate environment) in March.

After the FOMC meeting, on Friday the Bureau of Labor Statistics (BLS) announced blowout jobs data for January.  Companies added 353,000 payrolls, the most in a year and nearly twice what the market expected. Jobs gains were widespread across most sectors including professional and business services, health care, retail trade and social assistance. Moreover, the report also indicated that December’s job gains were much better than originally reported.  The month posted a robust gain of 333,000, which was an upward revision of 117,000 from the initial estimate of 216,000.

Average hourly earnings rose 0.6% month-over-month and 4.5% from a year earlier.  This strong wage growth may have been partially due to bad winter weather in mid-January reducing average weekly hours. The unemployment rate stayed at 3.7% for a third straight month, which is less than the 3.8% expected by the market. 

On a concluding note, after the FOMC meeting, many Wall Street economists pushed back their forecasts for the first rate cut to May or June from March, and the futures market is now pricing in just five quarter-point cuts this year.  These adjustments were borne out by last Friday’s jobs report showing that employers added the most workers in the last 12 months, and wages surged in January.  The strong jobs data makes Fed rate cuts unlikely in the near future, and should cause economists and businesses to recalibrate their rate cut expectations.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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