The U.S. April non-farm payroll report showed that 115,000 jobs were added during the month. While not particularly robust, it still indicates that the labor market is generally stabilizing, at least not weak enough to force the Federal Reserve to cut interest rates anytime soon. In contrast, the inflation problem remains stubborn. Analysts believe this could push the Federal Open Market Committee (FOMC), which sets interest rate policy, to shift further toward a hawkish stance and be more willing to maintain current interest rate levels for an extended period. The market increasingly believes that the Fed will find it difficult to justify a rate cut in the short term.
Lindsay Rosner, Head of Multi-Asset Fixed Income at Goldman Sachs Asset Management, stated that as the job market gets back on track, the Fed’s focus will shift to controlling upside risks to inflation. It might even remove its previously dovish bias regarding rate cuts from the statement at the June meeting. At last week’s meeting, three regional Fed presidents already opposed the “forward guidance” language in the post-meeting statement, arguing that the wording overly suggested that the next policy move was more likely to be a rate cut. Goolsbee, in an interview on Friday, said he had never been a big proponent of using language to guide market expectations, while also expressing concern about the current inflation trend. Current inflationary pressures are coming not only from gasoline prices and tariffs but also from rising service sector costs, which are pushing up overall prices.
Under traditional economic logic, a stable job market combined with a high-inflation environment would not support interest rate cuts. Scott Clemons, Chief Investment Strategist at Brown Brothers Harriman, said it is increasingly clear that the Fed can afford to be patient, and there is currently no economic reason whatsoever requiring it to cut rates further.
Expectations in the interest rate market have also begun to shift noticeably. Based on federal funds futures pricing, traders have now almost completely priced out the possibility of a Fed rate cut before April 2031, and have even begun to price in the probability of further rate hikes in the coming years. President Donald Trump’s nominee for the next Fed Chair, Kevin Warsh, faces an even more complicated situation. Warsh has long advocated for lower interest rates, believing the Fed can control inflation even under accommodative policy, and that monetary policy should be implemented more through adjustments to the Fed’s massive $6.7 trillion balance sheet. However, against the current backdrop of inflation still above 3%, pushing for a rate cut will be very difficult.
