Openings shrank, jobs rallied; FOMC likely to keep pace

Job openings are slowing

For months, Federal Reserve Chair Jerome Powell and the rest of the Federal Open Market Committee (FOMC) have looked for a sign that their nine consecutive rate hikes were cooling the economy. Chair Powell repeatedly indicated that one of the Fed’s main barometers in its fight against inflation was the robust jobs market. Then came the news on Tuesday from the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) that job openings in the economy fell below 10 million for the first time since May 2021. The JOLTS report indicated that the ratio of openings went from 2.0 jobs for every one person seeking employment to 1.7. While this is still a very hot market for people seeking employment, it may allow the FOMC to reconsider raising rates in its upcoming May 2 meeting. Interest rates initially fell as the release was a welcome signal. However, rates soon reverted as other news competed with the JOLTS narrative.

Unemployment fell, job gains stumble

The U.S. economy added 236,000 jobs in March and February figures were revised up to 326,000. The figures came in slightly below analyst expectations, while the unemployment rate fell to 3.5% from an anticipated rate of 3.6%. This is despite more technology companies announcing layoffs and job hiring pauses. Leading the gain, hospitality and government jobs continued their upward trajectory from their pandemic lows and continued to prop up the economy. The job gains lend themselves to the more hawkish members of the FOMC who believe a further push on rates is necessary to quell the robust market. The one caveat is that the March survey was conducted the week after the turmoil in the banking sector, which was not long enough for the collapse of Silicon Valley and Signature Bank to permeate through the broader economy. The one aspect of the economy that does align with the jobs figures is housing. Ahead of the busy spring season, the housing market is showing signs that the Fed’s effort to cool it down may have finally broken through. Mortgage rates fell from their 7% high to 6.28%. However new mortgage applications and refinancings both fell 4.1% and 5.4%, respectively.

The state of the market

Most analysts agree that the Fed is likely to raise rates a quarter of a percentage point in their upcoming meeting. Several members have vocally expressed their desire to continue pushing the disinflationary process. Citing the containment of the bank sector’s fallout, Federal Reserve Bank of Cleveland President Loretta Mester, who is an alternate member of the FOMC, stated that the broader committee is prepared for further hikes to achieve its 2% inflation target. President Mester was backed by the March summary of economic projections, which identifies the median terminal rate among the FOMC members as 5.125%, only slightly higher than the current rate of 4.75 – 5.00%.

Up next on the economic calendar is the release of the Consumer Price Index this Wednesday. The CPI report is widely expected to come in lower than the February figure of 6% year-over-year with President Mester’s Bank of Cleveland expecting a year-over-year increase of 5.2%. Should President Mester be correct and inflation data come in at or below expectations it could signal to the market that the May rate will become the terminal rate before The Fed starts its deceleration cycle. This outcome would be best for corporates, as it would signal that interest rates would also begin to come down in the second half of the year. Alternatively, if the inflation data increases past the February figures, it would embolden Chair Powell to push for further hikes. As it stands, the market has not factored in further increases, and this could push the cost of hedging for corporates even higher than current levels.