The U.S. labor market continues to show signs of recovery, with a steady trend in job creation and a decline in the quit rate, suggesting normalization and cooling. This keeps the door open for rate cuts later this year, according to analysts.
Job vacancies increased to 8.14 million in May, which is above expectations. However, the trend remains a decline in vacancy figures as the U.S. economy moves closer to pre-pandemic levels.
The quit rate was the major warning sign of an imminent increase in labor costs that caused inflation to spike in 2021 and remain elevated since then. However, the marked decline in the quit rate suggests that the labor market is cooling, as companies are less willing to pay more to hire staff or workers themselves are becoming more reluctant to move.
Similarly, The Conference Board states in its analysis that “the modest cooling of the labor market in the second quarter, from heated to robust, should be welcomed by the Fed.”
Additionally, the weakening of consumer demand and, consequently, the growth of real GDP in the first half of 2024 should have brought some calm to the labor market, adds The Conference Board.
However, with no signs of a collapse in the labor market, the Fed can maintain a restrictive monetary policy to drive consumer inflation back towards the 2 percent target.
“We continue to forecast that the unemployment rate will peak this year below the natural rate of 4.4%,” says the study, which adds that inflation is likely to stabilize at 2% by mid-2025, allowing for a 25 basis point rate cut at each of the November and December 2024 meetings.
According to ING Bank, wage growth and inflation should continue to cool, keeping the door open for rate cuts later this year, states an ING Bank report.
Fed Chairman Jerome Powell, speaking at the ECB Forum on Central Banking in Sintra, Portugal, acknowledged that the economy and labor market have been strong, but that inflation is showing “signs of resuming its disinflationary trend” along with a “rebalancing in the labor market,” adds the report signed by James Knightley, Chief International Economist, U.S.
While Powell declined to provide details on the timing of any potential rate cuts, markets are now pricing in a roughly 75% chance of a cut at the September FOMC meeting.
“If we get another couple of core inflation numbers at or below 0.2% monthly, unemployment exceeds 4%, and more evidence of cooling consumer spending growth, we believe the Federal Reserve will begin to shift monetary policy from restrictive territory to ‘slightly less restrictive.’”
