By admin 
Many have been wringing their hands over a potential surge in unemployment this year. The worry is for good reason. Unemployment has increased since 2023, and there’s been a steady drumbeat of layoff announcements this year, especially after the Department of Government Efficiency’s job cuts kicked in.
The Federal Reserve has been focusing on the jobs picture since last Fall, prompting Fed Chair Jerome Powell to cut interest rates by 1% through December.
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The policy shift led to widespread expectations that the Fed would continue cutting rates in 2025. Unfortunately, that hasn’t happened yet because of sticky inflation and fear that tariffs will increase prices.
Despite those concerns, market watchers have still been predicting that the Fed will cut rates by another quarter-percentage point in June. However, those predictions are shifting following a surprising jobs report for April.
The Fed hits the pause button as economy struggles
Gross Domestic Product, or GDP, measures economic activity. The advance GDP estimates for the first quarter aren’t overly reassuring, given that they reflect a 0.3% contraction in the economy, according to the Bureau of Economic Analysis.
The dip in GDP was caused mainly by companies pulling forward imports to avoid President Trump’s newly launched tariffs and an increase in gold trading activity, which has accelerated since Trump’s election.
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Nevertheless, the dip comes as other metrics also show signs that the U.S. economy is weakening.Â
The unemployment rate has increased to 4.2% from 3.4% in 2023, and layoffs jumped over 60% in April to over 105,000, according to Challenger, Gray, & Christmas, partially because of Department of Government Efficiency, or DOGE, job cuts.
The newly installed tariffs, which include a 25% tariff on Canada, Mexico, and autos, plus a staggering 145% tariff on Chinese imports and a 10% baseline tariff on imports, alongside job weakness, have taken a toll on consumer and business confidence.
Businesses are increasingly pressing the pause button on spending decisions and awaiting clarity on trade negotiations with China and other countries, subject to the currently paused reciprocal tariffs.Â
Meanwhile, consumers’ worries over upcoming inflation and job security have caused the Conference Board’s Expectations Index to plummet to 54.4 last month, the lowest reading since October 2011, and well below the 80 level that historically can forecast recession.
The combination of job jitters and inflation worries has left the Federal Reserve in a tight spot.
The Fed’s dual mandate is low inflation and unemployment, two goals that often contradict each other.
When the Fed raises rates, it slows the economy, causing job losses, but reducing inflation. When it cuts interest rates, it accelerates the economy, leading to job growth, but increasing inflation.
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The tug-of-war between the competing goals is particularly tense this year, given the uncertainty associated with tariffs, something Fed Chair Powell acknowledged recently.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” said Powell.
Jobs report throws cold water on June interest rate cut hopes
The potential for interest rate cuts has remained on the table this year because of the risk of a deteriorating jobs market.
Employment data released this week sent a mixed message.Â
On April 30, ADP’s jobs data showed just 62,000 newly created jobs in April, the least since July, and below Wall Street estimates of 120,000.
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ADP’s data added to the potential for rate cuts narrative, but optimism proved short-lived.
The Bureau of Labor Statistics’ monthly jobs report on May 2 showed the U.S. economy created 177,000 new jobs last month, outpacing the 138,000 estimate. Unemployment of 4.2% was unchanged from March.
If the data had been weaker, it would have fueled the interest rate fire. However, since the figures were stronger-than-expected, there’s arguably no need for the Fed to rush to cut interest rates.
The likelihood of the Fed staying sidelined isn’t lost on market participants.
According to the CME’s closely watched FedWatch tool, the probability of the Fed cutting the Fed Funds Rate in June dropped to 37% after the jobs report, from 55% on May 1 and down from 61% one month ago.
Odds that interest rate cuts will happen in July also shifted. The CME’s data suggests a 20% probability that interest rates will remain unchanged at the current 4% to 4.25% level in July, up from 8% one week ago.
Unsurprisingly, Treasury yields climbed, with the 10-year Treasury Note rising by 8 basis points to 4.31%, up from 4.17% on April 30.
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