July rate cut in play, say Fed watchers

The factory floor at Kenworth Truck in Chillicothe, Ohio, last month. The US government's jobs report released last Friday showed a sharp decline in the pace of hiring, adding to concerns that the economy is slowing.
The factory floor at Kenworth Truck in Chillicothe, Ohio, last month. The US government's jobs report released last Friday showed a sharp decline in the pace of hiring, adding to concerns that the economy is slowing. PHOTO: NYTIMES

WASHINGTON • The weak United States jobs report last month pushes the Federal Reserve closer to cutting interest rates, though maybe not all the way just yet.

While a reduction, when policymakers meet later this month, cannot be ruled out, Fed watchers said their base case is for the central bank to stand pat.

But they said the abrupt slowdown in payrolls growth last month - against the backdrop of President Donald Trump's escalating dispute with major US trading partners - does increase odds the central bank will cut rates perhaps as soon as next month.

Payrolls rose by 75,000 in May after a downwardly revised 224,000 advance the prior month, a Labour Department report said last Friday.

The increase missed all estimates in a Bloomberg survey calling for an increase of 175,000 and follows other softer readings on the economy.

Barclays economists Michael Gapen and Jonathan Millar responded to the report by projecting a half-percentage point cut next month which they had previously anticipated last September; they now anticipate another reduction of a quarter point in September, instead of at year-end.

The federal funds futures market shows a quarter-point cut almost fully priced in for next month, and indicate about 70 basis points of easing by the end of this year.

The weak jobs report comes after a string of mostly soft economic data. Retail sales, factory output and home purchases have shown the economy struggling this quarter after better-than-expected growth in the first three months of the year.

Fed chairman Jerome Powell and his colleagues will meet on June 18-19 to map out monetary strategy. Mr Powell opened the door to a possible rate cut last week when he said the Fed "will act as appropriate to sustain the expansion".

The weak jobs report comes after a string of mostly soft economic data. Retail sales, factory output and home purchases have shown the economy struggling this quarter after better-than-expected growth in the first three months of the year.

Business confidence has also been dampened by Mr Trump's simmering trade war with China and his threat to slap import tariffs on Mexico unless it curbed the flow of migrants to the US.

Goldman Sachs chief economist Jan Hatzius and his team said in a Friday note to clients: "The risks of Fed rate cuts have clearly increased."

Bank of America economists Joseph Song and Michelle Meyer said the jobs report supports their view that the Fed will reduce rates in September and December.

"We continue to believe it is too early to move in June as the Fed will likely want to see further evidence of weakness before easing," they wrote in a Friday note to clients.

JPMorgan chief US economist Michael Feroli agreed. "I doubt they go in June, but I wouldn't put a zero probability on it," the former Fed staffer said. His base case for now remains for two quarter-point rate cuts this year, in September and December.

But "it could be sooner than September and it could be more than 50" basis points, depending on what happens to the economy, he said.

Policymakers may also want to wait until after leaders of the Group of 20 nations meet at the end of this month so as to get a clearer picture of where the US dispute with China is heading, the Bank of America economists said.

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A version of this article appeared in the print edition of The Straits Times on June 10, 2019, with the headline 'July rate cut in play, say Fed watchers'. Print Edition | Subscribe