Employment growth was strong in March, which ultimately means mortgage rates are likely to stay higher for longer. But next week’s inflation data is the main factor the Fed will take into consideration.
The March jobs report came in hot. Strong growth in U.S. employment makes it more likely the Federal Reserve will delay their first interest-rate cut past June. But next Wednesday’s inflation report matters more.
Employment growth in March exceeded all expectations. Total nonfarm payroll employment increased by 303,000 in March, handily beating expectations of a 215,000 gain and exceeding the previous month’s increase of 275,000. In addition, the January and February numbers combined were revised up by 22,000. The unemployment rate fell back to 3.8%, as expected, after surging to 3.9% unexpectedly last month from 3.7% previously. The fraction of the population looking for employment actually increased last month, implying a large gain in jobs, which is what would need to happen for the unemployment rate to fall under those circumstances. Average hourly earnings increased at a rate of 0.3% month over month, or 4.1% year over year, as expected.
Employment growth is concentrated in specific sectors and might be partially attributable to recent surge in immigration. More than half of the job growth is coming from government, health care, and education. Construction and leisure and hospitality are also seeing strong gains. Sectors such as finance, information, and professional and business services are notably weaker. Economists have noted that it is difficult to reconcile recent surprisingly strong job growth numbers with population estimates. Research from Brookings helps to reconcile the two by taking into account changes in immigration patterns.
For homebuyers and sellers, this points to higher mortgage rates for longer. June versus July for the Fed’s first interest-rate cut now feels like a toss up, though what the Fed does depends on incoming inflation data. In the March 20 Fed meeting, the median forecast called for three rate cuts this year, the same as in their December projection. However, nine of the 19 participants had penciled in two or fewer cuts, which is more than before. That indicates that after some bumpier inflation readings these last three months, more Fed officials are feeling wary of their prior outlook, which was based on promising inflation data from late 2023. Ultimately, the Fed can cut two reasons: (1) inflation is where they want it to be, and/or (2) the labor market is weakening and we’re at risk of a recession. Today’s jobs numbers make it clear that the latter is not happening. The labor market is no longer overheated to the degree we need to worry about inflation spiraling out of control, but it is nowhere near a recession. That means there is less reason to hurry up and cut, though Fed Chairman Jerome Powell is likely eager to start cuts well before the election to avoid muddying the political waters. Whether we get that first cut in June depends on inflation data; we’ll get a fresh read of that next Wednesday with the March CPI report.
