Fed expected to hike rates despite slowdown in job growth

Despite June's relatively modest job-creation numbers and signs that the economy may be slowing, the Federal Reserve will likely hike rates at the next meeting as inflation remains above the central bank's mandate, said Candice Tse, New York-based managing director and global head of strategic advisory solutions at Goldman Sachs Asset Management.

"The U.S. economy is still growing below potential, inflation continues to decline, but still remains above the Fed's 2% target, keeping the Fed on track for another 25 (basis point) hike," she said by email. "However, we continue to expect that the Fed will soon reach its terminal rate, bringing it closer toward the end of its most aggressive tightening campaign in generations."

GSAM has $2.6 trillion in assets under supervision.

The U.S. economy created 209,000 jobs in June, slightly above expectations, but below May's downwardly revised figure of 306,000, the U.S. Bureau of Labor Statistics reported on Friday.

The unemployment rate clocked in at 3.6% in June, unchanged from the prior month.

Economists had expected an increase of 205,000 jobs in June with the jobless rate at 3.6%, according to a survey by FactSet Research Systems, a financial data firm.

The consumer price index rose 4% in May, the smallest 12-month increase since March 2021, but well above the Fed's 2% target.

Joseph H. Davis, global chief economist and global head of the investment strategy group at Vanguard Group, and Andrew Patterson, senior economist at Vanguard, jointly stated that the Fed still has more work to do.

"At 209,000 (new jobs), the economy is still adding more jobs than new entrants to the labor market," they said by email. "Wage growth ticked up and remains well above levels the Fed would be comfortable with in their efforts to bring inflation back to 2%."

Vanguard has $7.7 trillion in assets under management.

The jobless rate has ranged in a narrow band between 3.4% to 3.7% since March 2022, the Bureau of Labor Statistics noted in the release.

Employment levels continued to trend up in the areas of government, health care, social assistance, and construction, the bureau added.

Over the first half of 2023, the economy has added an average of 278,000 jobs per month, well below the monthly average of 399,000 jobs for the comparable period in 2022.

June's job creation numbers were the weakest since December 2020, when the payroll dropped by 268,000.

The Federal Reserve will likely closely examine the June jobs report as they prepare to release their next monetary policy decision on July 26.

As of Friday morning, according to CME Group's FedWatch tool, market participants' pricing of fed fund futures indicated there is a 92.4% probability that the central bank will hike rates by 25 basis points at the next meeting.

The Fed's key short-term interest rate is now in a range of between 5% to 5.25%, after the central bank held the rate unchanged at the June 14 meeting.

Ms. Tse of Goldman further stated that within fixed income, investors should be "extending duration, as relatively stickier yields on longer-duration bonds may prove valuable following the conclusion of the current hiking cycle." Within equities, she added, "managing active exposure is key with opportunities increasingly global, idiosyncratic, concentrated, and tax-aware."

Brian Mulberry, Denver-based client portfolio manager at Zacks Investment Management, said in light of the latest jobs report, the labor market needs to soften in a more material way before a "pause or pivot" in monetary policy will occur.

"Put simply, more people working, make more money, and they spend it — this has created a stable base of consumer spending over the last 12-14 months, keeping prices more durable than current policy is comfortable with," he said by email. "It seems the U.S. consumer will continue to spend at a fairly consistent level, making monetary policy necessarily more hawkish than markets have currently priced in. The biggest shock to markets is likely to be that we could see deflationary data not bring rates down, due to the strength of this labor market."

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