US Economy Shows Signs of Cooling, But Stubborn Inflation Keeps Fed on Hold

The US economy is exhibiting signs of moderation, with a still-robust but cooling labor market and persistent inflation pressures, according to a research report by Wells Fargo. This dynamic supports the Federal Reserve's patient approach to monetary policy, as the central bank opted to keep interest rates unchanged at its May FOMC meeting.

Labor Market Cools, Yet Remains Resilient

April's employment data revealed a continued trend of solid job growth, with total nonfarm payrolls increasing by 175,000. However, there are indications of a slight slowdown.

"The monthly payroll gain was a bit softer than consensus expectations and amounted to the lowest net increase since October 2023," says Wells Fargo. "The unemployment rate also ticked up slightly, rising to 3.9% from 3.8% in March.

Further evidence of a cooling labor market comes from the Job Openings and Labor Turnover Survey (JOLTS), which showed a decrease in job openings, hiring, and quits. Consumer confidence also dipped in April, partly due to concerns about job availability. Despite these signs of moderation, initial jobless claims and continuing claims remain low, suggesting that layoffs are not accelerating and job seekers are still finding employment relatively quickly.

Inflation Remains a Key Concern

While the labor market shows signs of cooling, inflation continues to be a major concern for the Federal Reserve, preventing a shift towards easing monetary policy. The Employment Cost Index (ECI), a key measure of labor costs, rose more than expected in Q1, indicating persistent underlying inflationary pressures. Although average hourly earnings growth moderated in April, labor costs are still running at a pace that is incompatible with the Fed's 2% inflation target.

Wells Fargo concludes that "the major reason that the FOMC is not in any hurry to begin a rate-cutting cycle is that progress on reducing price pressures appears to have plateaued." The combination of a resilient but cooling labor market and stubborn inflation suggests that the Fed will maintain its patient approach and keep interest rates on hold for the time being.