Wells Fargo economists say the Federal Reserve is unlikely to cut interest rates before June following stronger-than-expected labor data and cooling inflation.
The bank points to January payrolls rising by 130,000, topping expectations and lifting the three-month average to 73,000, while the unemployment rate fell to 4.3%.
“The upshot of a mini-government shutdown last week was the somewhat unusual alignment of indicators that brought fresh data on both jobs and inflation inside a span of 48 hours. This pivotal double header showed improvement on both of the Fed’s mandates.
The job market improved, even if hiring remains quite concentrated in the healthcare and social services sector, and inflation cooled more than expected. Hawks on the FOMC can now point to a labor market that is regaining its footing, but doves can cite the improvement in bringing inflation closer to target as a rationale for adjusting rates down another notch closer to neutral.”
At the same time, both headline and core CPI cooled, with core inflation slowing to 2.5% annually, its lowest level in nearly five years. Wells Fargo says the combination of stabilizing job growth and moderating inflation reduces the odds of a March rate cut, while keeping the door open for easing later this year.
“For months now, we’ve been saying that the window for additional Fed cuts is closing. Taken together, this week’s data has likely pushed the next rate cut out until June, with the prospects for any further rate cuts in this cycle remaining dependent on how the data evolve over the next few months. If the breadth of robust hiring extended beyond just a few sectors, we’d say the window for additional cuts is closed. For now though, the tepid pace of hiring ex-healthcare does not warrant such conviction.”
The bank added that wage growth slowed to 3.4% year over year in the fourth quarter, its weakest pace since 2021, while retail sales stalled in December even as aggregate holiday spending rose 3.6% from a year earlier.
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