More US jobs added in April than expected: Here's what that means for interest rates

Job growth likely to decelerate in coming months, economists say

Job growth was higher than expected in April, keeping the Fed on its current track to raise rates.  (iStock)

Job growth in the United States increased at a higher-than-expected rate in April, according to the latest Employment Situation Summary from the Bureau of Labor Statistics (BLS). 

Total nonfarm payroll employment increased by 428,000 during the month, the report said, while the unemployment rate went unchanged — at 3.6%. Job gains were largely made in major industries such as leisure and hospitality, manufacturing and transportation and warehousing. 

The growth is down slightly from the increase of 431,000 jobs in March, but is still a gain that was higher than anticipated for April. However, strong wage gains could worsen inflation in the coming months.

"The labor force participation rate has declined 0.2 percentage points compared to the previous month, indicating a slight decrease in labor supply," said Dawit Kebede, Credit Union National Association (CUNA) senior economist. "Participation is expected to go up if the pandemic becomes less of a health concern. Strong demand for hiring, coupled with low labor supply, continues to increase wages, adding more inflationary pressure. A persistent imbalance in labor demand and supply may lead to a wage-inflation spiral."

Other economists agreed inflation could get worse before it gets better as average hourly earnings increase. Fannie Mae Chief Economist Doug Duncan said that "wage growth is a clear signal that firms are looking to hire, [but] it could exacerbate the inflationary pressures already present in the economy."

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Job growth to decelerate, economists say, and Fed rate hikes could continue

While job growth was strong in April, economists say Friday’s report points to a deceleration in the months to come. 

"Headline job growth met expectations in April, but the details point to a decelerating labor market," said Curt Long, National Association of Federally-Insured Credit Unions (NAFCU) chief economist and vice president of research. "Labor force participation declined, and job gains were concentrated in areas like restaurants and hotels which suffered during Omicron and are not likely to continue. Average wages grew at a robust 5.5% pace on a year-over-year basis, but by only 3.7% in the past quarter on an annualized basis."

However, the forecasted deceleration in job gains will do little to change the current monetary policy path of the Federal Reserve, which plans to raise interest rates several times in the coming months. 

"Sturdy job gains will keep the Federal Reserve on its present course, and credit unions should continue to expect two more 50-basis point rate hikes this summer," Long said. 

At its latest meeting in May, Federal Reserve members raised rates by 50 basis points, increasing the target range for the federal funds rate to 0.75% to 1%. This was the second rate hike since the start of the COVID-19 pandemic, and Friday’s jobs report is likely to do little to change future rate hikes. 

"Overall, we believe this report will not alter the Federal Reserve’s plan to continue to raise the policy rate multiple times over the coming months," Duncan said. 

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Fewer Americans are working from home, which could strengthen the housing market

As COVID-19 concerns diminish, more companies are asking their employees to return to physical offices, and fewer Americans are working from home as a result. 

"There was another big decline in the number of people teleworking due to the pandemic – 7.7% compared to 10% in March," said Mike Fratantoni, Mortgage Bankers Association (MBA) chief economist. "Clearly, big employers are beginning to bring employees back to the office. This is another piece of good news for the office market, even beyond the strong signal from continued rapid job growth."

The back-to-office rush could also strengthen the housing market given the strong wage growth, he suggested. 

"Housing demand continues to benefit from one of the strongest job markets we have experienced in the last 50 years," Fratantoni said. "Although mortgage rates have risen sharply, and home prices have continued to rise at a rapid pace, we expect that many potential homebuyers will continue to be in the market given their strong financial position."

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