The U.S. economy looks to be on the verge of hitting two highs simultaneously — peaks in inflation and job creation that could be important influences on the path of monetary policy. May’s nonfarm payrolls report corroborated other recent evidence that while the jobs market remains strong, future gains could be tempered. At the same time, investors will be watching Friday’s consumer price index report for more indications that inflation, though still strong and running well above anything the U.S. has seen since the early 1980s, is cooling — if only incrementally. The Federal Reserve will be watching both indicators intensely over the coming months to see just how much they’ll have tighten beyond the two 50 basis point rate hikes expected this summer and the onset of balance sheet reduction that started in June. As things stand, markets are pricing in strong probabilities of half-point rate hikes in not only June and July — as Fed officials have strongly indicated — but also September. Policymakers in recent days have suggested they would use the two summer increases as tests to see how inflation holds up. Then, they would proceed as necessary from September on. The trends in inflation and employment indicate the Fed could have some wiggle room by then. While Friday’s jobs report showing a gain of 390,000 easily topped Wall Street estimates, it was also the lowest monthly increase since April 2021. Average hourly earnings, another key inflation metric, increased just 0.3% for the month, though still 5.2% year over year. “In our estimation, this is likely going to be the last robust employment report in this business cycle,” said Joe Brusuelas, chief economist at RSM. “What I think we’re observing is the unfortunate interplay between inflation and hiring,” he added. “Inflation picked up due to an overheating economy, just as firms were trying to adjust in the aftermath of the pandemic, which all results in general overheating, especially in the tech sector and among small businesses, both of which are observing the first signs of easing in demand.” The result, Brusuelas said, is a jobs market that likely will retreat quickly from the stunning 2021 pace of 562,000 jobs a month to something more in keeping with the pre-pandemic trend of around 200,000 a month. There have been signs of weakening employment trends elsewhere: The June ISM Manufacturing report’s employment indicator pointed to a mild pullback, small business surveys also have indicated slowing or freezes in hiring, and the Fed’s own Beige Book report last week said employment across its 12 districts increased “modestly or moderately.” Declines in the pace of private payroll gains this year are “a pretty big sign that we’re coming off the boil,” Brusuelas said. On inflation, the drop may be less notable, though still significant. Friday’s CPI report is expected to show a headline month-over-month gain of 0.7% but an ex-food and energy increase of just 0.5%. The two numbers would equate into respective annual increases of 8.2% and 5.9%, still strong but a continued progression lower from the March peaks . The Fed should take its time assessing the data and not commit to a more aggressive rate-hiking schedule, said Drew Matus, chief market strategist at MetLife Investment Management. “If you assume they go 50 basis points the next two meetings, by Sept. 21, what’s the data you’re dependent on going to look like? I don’t think they know and I don’t think they can now,” Matus said. “So maybe a little humility as we go through August would serve everyone.” The Fed would welcome both a cooling jobs market and lower inflation. But officials in recent days have said they won’t be swayed by short-term moves in the data and are committed to keep pushing rates higher until the labor market comes back into balance and inflation shows consistent retreats from current levels. “I’m looking at a plethora of measures on inflation. I want to see those monthly numbers, the monthly increases, on a downward trajectory,” Cleveland Fed President Loretta Mester told CNBC on Friday . “But it’s going to take compelling evidence. It can’t just be one month’s numbers.” Mester said she doesn’t think inflation has peaked, though she expects Fed policy to begin to have effect.
