The odds that the Federal Reserve will raise short-term interest rates in June, the second increase this year, climbed Friday as U.S. payroll expansion boosted confidence in stable economic growth.
Employers added 223,000 jobs in May, according to the Bureau of Labor Statistics, faster growth than the previous month and higher than economists’ average forecast of 190,000 jobs. The jobless rate, meanwhile, dipped to 3.8 percent, the lowest since the last year of Bill Clinton’s presidency.
The numbers are “consistent with the Fed’s optimistic view on the U.S. economy” and support a 25 basis-point increase this month, said Michael Gapen, an economist with British lender Barclays. Members of the Fed’s monetary policy committee, which sets rates, have signaled three to four increases this year – which would move interest as high as 2.25 to 2.5 percent.
“Borrowers and investors, among others, should prepare for the possibility of a total of at least three,” said Mark Hamrick, senior economic analyst for Bankrate.com. “That means paying down debt and being aware that the stock market will likely remain volatile.”
Indeed, U.S. stocks reached record highs earlier this year before retreating amid concern about rising interest rates and trade conflicts ignited by President Trump’s protectionist policies.
The blue-chip Dow Jones Industrial average sank on Thursday as the White House imposed tariffs on metals imports from America’s closest allies, spurring prompt retaliation, then rose with Friday’s upbeat employment report.
Both lawmakers and economists have warned that the president’s actions are imperiling gains from a GOP-led tax cut last year, and Hamrick said they may ultimately hurt the labor market as well.
“Remember the commonly-cited complaint from the business lobby about then-President Obama’s approach: ‘Adds to uncertainty,'” he said. “This president has taken that risk to a much higher level. Along with further alienating our strongest allies, the moves risk lifting inflation which will disproportionately affect the very individuals, among others, who voted to send Mr. Trump to the White House.”
Those concerns remain peripheral, for now, to the short-term economic outlook and shouldn’t materially affect the central bank’s immediate plans, said Joseph Song, an economist with Bank of America.
“The latest round of U.S. data should keep the Fed on track for a rate hike in June,” he said. Trading in interest-rate futures on Friday, tracked by the CME Group, showed an 89 percent chance of a 25 basis-point hike later this month, up slightly from the day before.
That’s good news for lenders such as Citigroup and Wells Fargo, which typically boost profitability by passing increases along to their borrowers more quickly than depositors.
