The US added many more jobs than expected: why should the Fed pivot on interest rates early?
The US added many more jobs than expected in January, in another show of strength for the economy. This is a victory for US President Joe Biden, who will be the most likely Democratic candidate for the 2024 election.
A total of 353,000 non-farm payrolls were added to the US job market, compared to the 180,000 predicted by Refinitiv. The US economy doubled expectations again, similar to its 3.3% GDP growth in Q3 compared to the 1.5% expected.
Added jobs in November and December were also revised upwards, respectively 182,000 and 333,000. Previously, the job market was expected to have slowed down at the end of the year, initially calculating just 126,000 total jobs added for the two months.
Professional and business services got the highest growth share with 74,000 in January. Healthcare added 70,000 and retail trade 45,000.
Unemployment levels are also at historically low levels, flatlining between 3% and 4% since January 2022. Last January, unemployment came in at 3.7% compared to 3.8% expected.
The US job market therefore powered through almost two years of interest rates at 5.5%. The Federal Reserve expressed surprise several times at the resilience of the US job market and economy as a whole.
The question now becomes: how is this relevant for future interest rate policies?
An unlikely early pivot
Markets are expecting several interest rate cuts coming in 2024. However, the Fed always expressed caution at the pivot. Chairman Jerome Powell made it clear several times that the Fed would start cutting rates when inflation is on a clear path toward 2%.
Inflation in the United States hovers around the 3% mark, still very far from the Fed’s target.
Furthermore, the great economic performance of the United States could lead the Fed to believe no cut is needed. According to the Atlanta Fed, GDP growth in the first 2024 quarter will be 4.2%, an overwhelmingly positive amount.
Experts agree that recession in the US is now a remote possibility and even stagnation appears unlikely.
The only factor that could move up the Fed’s pivot is the November elections. The economy is generally regarded as a top priority for American voters: a recession would destroy any chances for Biden at being reelected.
Although the Fed is formally an impartial body, Jerome Powell never made a secret of his preference for Biden. Cutting interest rates for the first time in June could give the final push for his reelection. It all depends, however, on the future inflation path.
