As Trump Flames Powell For Holding Back On Rate Cuts, Economists Divided On Fed's Approach

After a steady May jobs report that was released Friday, economists are at a crossroads about their view on the monetary policy. While some believe that the Federal Reserve should hold onto its “wait and see” stance, others affirm that the central bank can start cutting interest rates.

What Happened: While most economists were in consensus that the Federal Reserve should wait for the tariff implications to play out before cutting interest rates. Jamie Cox, the managing partner at Harris Financial Group, believed that the Fed should start cutting interest rates as soon as July.

“The labor market is strong, but cooling. I expect this report, with all its revisions, to bring the Fed back into cutting mode in July,” he said.

According to the data shared by the Bureau of Labor Statistics, the nonfarm payrolls rose by 139,000 in May, beating consensus expectations of 130,000. However, it was lower than its average monthly gain of 149,000 over the last 12 months.

However, Chris Zaccarelli, the CIO at Northlight Asset Management said, “The Fed should be reluctant to cut rates because the full effects of tariffs haven't impacted inflation numbers yet and the job market isn't deteriorating enough to force their hand, which is why we don't expect them to cut rates until the end of this year, if at all.”

And Jeffrey Roach, the chief economist at LPL Financial, said, “If payroll growth trudges on like this, the Fed will likely remain in ‘wait and see’ mode.”

Why It Matters: Apart from nonfarm payrolls, the average hourly earnings rose 0.4% from a month ago and 3.9% from last year. Thus, the wages rose faster than inflation, giving workers some relief from inflation pressure.

The unemployment rate was unchanged at 4.2% and has been rangebound for the past year. The employed population stood at 59.7%, a decline from last month and still below the Jan 2020 level.

On Friday, senior economist Mohamed El-Erian said in an X post that the central bank should wait to cut the rates, given that “both May job creation and wage growth were higher than consensus forecasts.”

The CME Group's FedWatch tool‘s projections show markets pricing a 99.9% likelihood of the Federal Reserve keeping the current interest rates unchanged in its June meeting. However, the odds of a cut increased over 60% for the September, October, and December meetings.

The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, rose on Friday. The SPY was up 1.03% to $599.14, while the QQQ advanced 0.98% to $529.92, according to Benzinga Pro data.

On Monday, the futures of the S&P 500, Dow Jones, and Nasdaq 100 indices were trading lower.

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