Labor market will be the ‘focus’ of Fed rate cuts: Economist

The S&P Global US Services PMI (Purchasing Managers’ Index) came in weaker-than-expected for March, with a reading of 51.7. S&P Global Market Intelligence Chief Business Economist and Executive Director Chris Williamson joins Yahoo Finance Live to discuss the potential implications of this data on the Federal Reserve’s interest rate cut outlook.

Williamson states that recent inflation data points indicate 2024’s first quarter experienced “robust growth.” He also highlights that the economy has maintained “decent job growth,” noting that the labor market is “where the focus is going to lie.” Williamson points out that both the ISM and S&P’s PMI data released this morning are “influenced by wages,” emphasizing the labor market as an “area of concern.”

Despite these concerns, Williamson still believes a June rate cut could materialize. He notes that while further inflation prints are needed to provide the Fed with “more confidence,” he maintains the belief that it can achieve its 2% inflation target by mid-year 2024.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s note: This article was written by Angel Smith

Video Transcript

MADISON MILLS: S&P Global’s US Services PMI coming in at 51.7, ticking down to a 3-month low in March. Still remaining above the 50 mark, signaling a rise in business activity for the 14th consecutive month.

Joining us now, we have Chris Williamson, S&P Global Market Intelligence Chief Business Economist and Executive Director. Thank you so much for joining us this morning. I was saying that it’s kind of a pick your poison when it comes to the data. What data have we heard so far this week that you think is going to be at the top of Jay Powell’s mind as he comes and gives these remarks in a little over two hours here?

CHRIS WILLIAMSON: Good morning. Yeah, there’s a mixed bag really. I think the key message from what we’ve seen in the recent releases, including the ISM data just out and the S&P Global Services PMI, is that the first quarter certainly looks like it was robust growth. These numbers from the activity side cooling a little, but still consistent with an economy that’s growing at least at 2% annualized rate.

And as we saw from ADP as well, generating some decent jobs growth. Certainly, that labor market not cooling especially rapidly. And I think that’s where the focus is going to lie, that labor market and the pay data especially.

Now the ISM data and the S&P data today showed this diverging pattern in price trends. Now ISM– the price index, they’re cooling quite markedly in contrast. The S&P Global PMI showed accelerating price pressures in services. Now that latter is much more influenced by wages. ISM is much more materials focused. And that explains that divergence probably.

So what you’ve got here is this persistent wage pressures with this tight labor market. Just look at those ISM data. You’ve got very strong new orders of growth and activity growth, but falling employment. This is because firms just can’t get those staff, so they’re having to pay them more.

So that’s going to be the area of concern, that labor market. The Fed is still going to want to see that the signs of that labor market cooling. And hopefully, we’ll see that at the end of this week with those updated wage data.

SEANA SMITH: Chris, how much more tricky then does that make the Fed’s job that when we talk about the last mile and taming inflation, trying to get it under control– if we talk about some of the pressure that we are seeing this move to the upside within wages, obviously a labor market that remains very tight. How much do you think that could potentially delay the Fed’s first rate cut?

CHRIS WILLIAMSON: Well, we still think June looks the most likely. You’ve got a few more inflation prints before then to give them some confidence that inflation is coming down quite nicely. And by then, it should be around the 2% mark the headline inflation rate. But the question– that’s base effects, bringing that down as well.

And if you look at the month on month rates, certainly with these survey data that we’ve got, it’s suggestive that you’re going to see some stickiness come back into the numbers. So we’re running at levels that are sort of around 3% inflation mark going into the second half of next year.

So that’s going to really make for an interesting discussion as to whether June is the month where we’ll see the first cut. We still think that’s on. We still think the headline numbers are going to calmed down sufficiently to generate that. And then hopefully, by then, the labor market will be starting to cool, the wage data in particular, as those headline inflation numbers bring down the wage bargaining power for new pay deals.

And that feeds through to this softer labor market picture from an inflation perspective, allowing another two rate cuts in the second half of the year. That still looks on track for this. There’s nothing here that we’ve seen today especially that’s not that off track.

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