The strong job growth in April suggests a higher probability that inflation can be brought down without a recession.
Friday's employment report for April showed job gains strong but slowing — an ideal outcome for the Federal Reserve, which is looking for signs that the labor market is not so hot that it is adding to inflation but, at the same time, does not want outright job losses. In other words, the report raised the possibility of an economic "soft landing," or one in which inflation is brought down without a recession.
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Bond market data following the release of the report Friday indicate investors expect the central bank not to raise interest rates again, even though the jobs report exceeded forecasters' expectations.
Even right after the strong report, investors assigned about a 92% chance that the Fed will not hike rates at its next meeting in June, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
Investors foresee the Fed cutting rates in subsequent months, reflecting fears of a downturn.
PNC chief economist Gus Faucher said after the new numbers came out that, while his firm still expects a mild recession, “this job report is consistent with a soft landing, in which the economy slows and the labor market cools off to a more sustainable pace, but without a recession.”
Employment growth has slowed but stayed positive even as inflation has slowed.
Fighting inflation has been the Fed’s No. 1 priority over the past year after prices began to climb at the quickest pace in decades. Inflation, as gauged by the consumer price index, rose to as high as 9.1% over this past summer.
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Annual inflation slowed to 4.2% in March, as gauged by the Fed's preferred index, the personal consumption expenditures index.
Still, the Fed’s target is 2%, and there are signs that underlying inflation might be more difficult to bring down than the headline numbers suggest. Most notable, "core" inflation — that is, inflation excluding the volatile categories of food and energy — stood at 4.6% in March, right where it was to start the year.