Robust jobs report gives Fed more reason to stay put

Bloomberg News

A robust employment report for April indicated that President Donald Trump's economic initiatives have not yet hampered the jobs market while giving the Federal Reserve little reason to change interest rates next week.

The Bureau of Labor Statistics reported that the economy added 177,000 jobs in April, beating the Dow Jones consensus of 134,000 jobs and the average monthly gain of 152,000 jobs over the past year. The unemployment rate remained unchanged at 4.2%. Even so, BLS lowered its February and March job gains by a combined 58,000 over those two months, indicating that the labor market has begun to soften. 

The U.S. economy has been in an uneasy stasis since the beginning of the Trump administration. The president unveiled a tariff regime on April 2, imposing steep levies on U.S. trading partners in an effort to cut the trade deficit. Markets panicked before Trump paused most of those tariffs for 90 days, spurring a rally that was later muted by the president's comments about removing Federal Reserve Chair Jerome Powell, only to rally again when Trump walked those comments back.

Banks have been especially susceptible to fears of a recession, since their profitability hinges on consumers and businesses taking out loans, and fewer loans are made when the economy is poor. The inflationary pressure brought about by increased import tariffs could create the conditions necessary for stagflation, when both economic contraction and increasing prices are occurring at the same time. Those conditions put the Fed in a bind, having to choose between lowering interest rates to spur economic activity and raising them to maintain price stability.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said in a statement that the higher-than-expected jobs report combined with lingering economic uncertainty is likely enough to persuade the Fed to keep interest rates steady for the time being. 

"Despite the financial market volatility in April, and expectations of a sharp slowdown in economic activity in the coming months, these data will be enough to keep the Federal Reserve on the sidelines for now, as they assess whether the threat to economic growth or inflation is the bigger concern," Fratantoni said. 

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Nancy Vanden Houten, lead U.S. economist for Oxford Economics, said supplementary data showed that more workers were losing their jobs and those that were out of work were remaining out of the job market for longer than in prior months, suggesting that economic conditions are worsening, albeit gradually. 

The federal government shed some 9,000 jobs in April, but increases in local and state government employment led the overall government employment number to rise by 10,000. Vanden Houten said further federal layoffs combined with larger private-sector terminations could cause the unemployment rate to rise in future months.

"Increases in the number of permanent job losers and the duration of unemployment are both consistent with a labor market with a slow rate of hiring, making it difficult for the unemployed to find new jobs," Vanden Houten said in a statement. "While we are not forecasting massive layoffs, we do expect a jump in federal layoffs and some private-sector layoffs to occur this year and anticipate the unemployment rate rising to close to 4.8% by Q4." 

Curt Long, chief economist with America's Credit Unions, said layoffs in job sectors closely tied with trade, such as trucking, would likely contract further as the president's tariff regime comes into clearer focus. But Long said the ambiguous economic landscape would likely push the Fed to maintain interest rates at least through the second quarter of this year.

"There are reasons to remain concerned that industries like trucking will see significant job losses in future months, as shipping volume is already contracting," Long said in a statement. "But this is a reassuring report that likely pushes any rate cut from the Federal Reserve to the second half of the year at the earliest."