The job market held up in May. But the Fed may have already decided to pause

The US labor market picked up momentum in May, once again defying expectations of a slowdown. But Federal Reserve officials are still likely to suspend rate hikes in their upcoming policy meeting because of broader trends pointing to a weakened economy later in the year.

The debate over suspending rate increases or hiking yet again later this month has remained intense, and May's robust jobs report certainly makes it even more difficult to decipher what's going on in the economy, but there seems to be enough of an argument for Fed officials to defend a pause, or a "skip," in rate increases when they meet on June 13-14.

That would snap a streak of 10 consecutive rate hikes that raised the central bank's benchmark lending rate to a range of 5-5.25%, the highest level in more than 15 years.

Some officials have said a pause would allow them to assess the impacts of the central bank's most aggressive rate-hiking campaign since the 1980s and some have also cautioned of additional factors expected to further slow economic activity, such as tougher lending standards, along with other lagged effects of tighter monetary policy. Many economists, including those at the Fed, still expect a recession later in the year.

That's essentially the argument for a pause. President Joe Biden's pick to be the Fed's second-in-command said as much on Wednesday, but cautioned that it doesn't mean the Fed can't resume rate increases if needed.

"A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle," said Federal Reserve Governor Philip Jefferson at a conference in Washington, DC, this week. "Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming."

Federal Reserve Bank of Philadelphia President Patrick Harker echoed Jefferson's view this week that it would be appropriate to vote for a pause in June because of factors already pulling on the economy's reins.

"I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to bring inflation back to the target in a timely manner," Harker said Thursday during a moderated virtual discussion hosted by the National Association for Business Economics. "We should at least skip this meeting in terms of an increase. We can let some of these things resolve themselves, at least to the extent they can, before we consider - at all - another increase."

It's still possible that the Fed could hike rates later this month, mostly if the latest Consumer Price Index to be released on the first day of the Fed's two-day policy meeting shows that inflation accelerated in May. Some officials have expressed concern recently that inflationary pressures persist - but it seems like those with a dovish approach have built a strong case for a pause.

"This report shouldn't really tilt the decision one way or another, and it should give the Fed another reason to be data dependent and look at the totality of the data that comes in before they have to make a decision," Julia Pollak, ZipRecruiter's chief economist, told CNN.

The labor market and signs of future disinflation

The May jobs report mostly showed that the labor market held up. Employers added a robust 339,000 jobs last month, the Bureau of Labor Statistics reported Friday, though the unemployment rate climbed to 3.7% from 3.4%, the largest month-over-month increase since April 2020. Job openings rose to 10.1 million in April, after declining for three months in a row, the BLS reported earlier this week.

Despite 10 consecutive rate increases since the Fed began to lift rates in March 2022, the job market has remained solid even as other parts of the economy, such as housing, have buckled in some areas. That's good news for American workers, but the jury is still out on whether that's a good or bad thing for inflation. Some top economists have argued that the strong labor market has had a minor, albeit growing, impact on inflation.

"If you've talked to CEOs, you'd know they largely agree that there was a significant inflation issue about a year ago, but that has really moderated over the last year even as the labor market remains pretty tight," said Dave Gilbertson, a labor economist at UKG. "That would suggest that the labor market hasn't had nearly as big of an effect on inflation as the supply-chain disruptions about two years ago."

A recent paper co-authored by former Fed Chair Ben Bernanke argued that an economic downturn would be necessary to address the labor market's minor but persistent influence on inflation, which has indeed cooled in the long run.

And inflation might cool even further because of slowing shelter costs, which make up more than 40% of the Consumer Price Index's core measure.

"Some of that data should certainly start to filter through in the next month or two," Jack Macdowell, chief investment officer at The Palisades Group, told CNN. "It will be really interesting to see what type of impact owners' equivalent rent is going to have on inflation because that is definitely a lagged effect."

Against a pause

But what about that uptick in the latest reading of the Fed's preferred inflation gauge? The Personal Consumption Expenditures price index rose 4.4% for the 12 months ended in April, up from a 4.2% increase seen in March, as consumer spending also jumped 0.8% that month.

Hawkish Fed officials still think the Fed's job isn't done. Federal Reserve Bank of St. Louis President James Bullard, one of the Federal Open Market Committee's most hawkish voices, advocated for two more rate hikes during a moderated discussion last week. But in an analysis written by Bullard on the St. Louis Fed's website published Thursday, the St. Louis Fed chief struck a more balanced tone for inflation's descent in the future.

"The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required," he wrote.

If the CPI reading for May shows that inflation accelerated or stalled that month, that may just tilt the scale in favor of the FOMC's hawks. But Fed Chair Jerome Powell did say that "the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy."

Decision making at the Fed

The Fed is at a pivotal point in its current war on inflation, which means that some FOMC members might start dissenting as soon as the June policy meeting.

"As you come to turning points, there's always somebody who doesn't want to carry along with it, so yes, I think (dissenting) is characteristic of the Fed when opinions are shifting, so I think that is quite likely," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a webinar this week.

Members can dissent because they think the central bank should pause rates or hike at a different pace. At this point, the Fed's decisions aren't as easy or clear cut as when inflation was obviously running red hot last summer, economists said.

Still, it doesn't mean they haven't already been debating with their counterparts. But the optics of not eventually reaching a unanimous decision might be problematic for the central bank's credibility.

"There is usually no dissent in terms of policy moves, and in terms of confidence, they have to show that their agreement is unanimous because then the markets are going to start to second guess them," said Eugenio Alemán, chief economist at Raymond James.

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