Jobs report 'doesn't change' Fed rate cut outlook: Economist

The March jobs report showed an addition of 303,000 jobs to the market, accompanied by an unemployment rate of 3.8%. Citi's Chief US Economist Andrew Hollenhorst joined Yahoo Finance Live to provide insight into the potential implications of this data for future Federal Reserve rate cuts.

Hollenhorst acknowledges that the jobs report was stronger than expected, but emphasizes that it does not significantly change the overall landscape. He states that this is "exactly the kind of jobs report" the Federal Reserve aims to see, supporting strong job growth without a corresponding uptick in inflationary pressures that would raise concerns.

Hollenhorst notes that recent Federal Reserve rhetoric has pushed a narrative that the "potential" of the US Economy is greater and that job growth is higher than previously anticipated. As a result, he believes this type of robust job report could still keep the Fed "on track" to implement rate cuts.

Furthermore, Hollenhorst believes the Fed knows that current interest rates are "restrictive at these levels" and that failing to cut rates could potentially slow the economy in the future. However, he also highlights two major concerns: First, cutting rates too early could risk reigniting inflationary pressures, and second, there are risks to "the employment side," which could see "a quick shift toward layoffs."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

SEANA SMITH: All right. Well, the US added 303,000 jobs in the month of March. That was well above the Street's expectations. Now, Citi is saying in a recent note that they expected the job market to weaken with just 150,000 jobs added in March, leading to 125 basis points of cuts this year, almost double what the market is currently pricing in.

So where do things stand following this tighter-than-expected jobs print that we got out this morning. We want to bring in one of the economists behind that call. We have Andrew Hollenhorst. He's the Citi's Chief US Economist. Andrew, it's great to see you here. So first, just your reaction to the print that we got out this morning and whether or not that changes your base case for the Fed and the degree of the cuts that you are expecting this year.

ANDREW HOLLENHORST: Yeah, this is a much stronger than expected jobs report, like you said, stronger than our forecast, stronger than consensus forecasts. I don't know that it changes that much for the Fed at the end of the day or that we should be changing our forecast at Citi. And I'll explain why.

From the Fed's perspective, this is exactly the kind of jobs report that they want to see, like you explained, very strong job growth but not a pickup in inflationary pressure to the extent that it would concern Fed officials.

What we've seen from the Fed recently is a real tolerance for somewhat stronger wage growth, somewhat stronger price growth. To your point, year-on-year inflation readings, year-on-year wage growth readings are coming down. That's going to keep the Fed encouraged that we can actually run this stronger job growth. And it's not going to lead to a re-acceleration in inflation.

Now, is that something they should be worried about? I think they should be. But if you've listened to the recent Fed rhetoric, they're really pushing a narrative that the potential of the US economy is greater and that potential job growth is higher so that you can have these jobs numbers and you can still have the Fed on course to cut rates later this year. We haven't heard from Fed officials after the report. I think when we do-- what we'll hear is that they still think they're on that path to cuts.

- Well, you bring up an interesting point that Mohamed El-Erian kind of mentioned this morning, saying that the Fed is sort of acting like-- I'm extrapolating here but like a sports commentator. They're just commenting on the data as it comes in. They don't have the central thesis driving them. But it sounds like you might be picking up on some sort of central thesis from them that you might disagree with. Can you spell that out for me a bit more?

ANDREW HOLLENHORST: Yeah, I think where the Fed has been-- and I would agree with Mohamed El-Erian on this-- is that the Fed has been very, very reactive to each data point. And that kind of happened throughout 2022, even into 2023, as the inflation readings just kept coming in stronger than expected.

And what they're trying to shift to now I think is a kind of consensus around the idea that in their view, interest rates are restrictive at these levels. And if they don't begin bringing down interest rates, that will slow the economy later in the future. So they need to start bringing interest rates down now to prevent that slowing that could happen in the future.

I think that's where they are as a committee. But there are two risks to that, like you pointed out. One risk is that you cut rates too early. And that re-accelerates inflation. And we have a lot of signs that inflation is really not getting back to 2%. It looks a lot stickier around 3%.

There's also a risk to the other side of the mandate, the employment side of the mandate. Now, you're certainly not seeing it in the jobs figures today, very strong hiring, a low unemployment rate. But when you look at some of this data in detail, you see things like the unemployment rate that, yes, it's low. But it's risen almost half a percentage point.

And when you get this kind of gentle slowing in the labor market, especially when you might have some labor hoarding that's going on, people had trouble hiring, so they're reluctant to fire now, firms are reluctant to engage in those layoffs, you can have a quick shift towards layoffs. So you really want to be careful with this labor market data. Yes, in terms of where we are today, very strong. In terms of where we're going, there's still a lot of open questions.