It’s probably too soon for the Federal Reserve to cut official U.S. interest rates to bolster economic growth, Bank of America economists wrote Friday in a report, even after a Labor Department report showed that businesses slowed hiring dramatically in May.
The prediction by Bank of America, the second-biggest U.S. lender, comes as a growing number of traders speculate that the Fed will cut rates by as soon as this month. The Fed often cuts interest rates to stimulate the economy during a recession or steep slowdown.
Bank of America had previously predicted that the Fed would cut rates in September and December. The labor-market report for May was so weak that the U.S. central bank is now likely to speed up the monetary stimulus, though June is probably too soon, according to the Bank of America economists, Joseph Song and Michelle Meyer.
Currently, the official U.S. interest rate is set in a range from 2.25% to 2.5%.
“We continue to believe it is too early to move in June as the Fed will likely want to see further evidence of weakness before easing,” the economists wrote. “That said, the Fed will likely send a very dovish message at the June meeting,” and the labor-market weakness “clearly puts July in play for a cut.”
The hiring slowdown is noteworthy because the U.S. labor market’s strength has been one of the brightest spots of President Donald Trump’s economy.
Friday’s report showed that nonfarm payrolls rose by 75,000 in May, down by roughly two-thirds from April’s increase. Economists surveyed by the data provider FactSet had projected a gain of 182,500 jobs.
The economy usually needs to create about 100,000 new jobs each month, on average, to keep pace with growth in the working population.
The monthly employment report is noteworthy because it’s one of the earliest and most reliable indicators of how the economy is performing. So the disappointing jobs growth reported for May could add to recent signs that U.S. output is decelerating as the initial impact fades from Trump’s $1.5 trillion of tax cuts enacted in late 2017.
According to exchange operator CME, futures markets as of Friday were implying a 26% chance of a rate reduction at the June 18-19 meeting, up from 17% on Thursday.
Economists from Wall Street to the Federal Reserve have warned that Trump’s intensifying trade war with China is hurting confidence among households and businesses — a factor that usually leads to lower spending and investment in future growth.
Fed Chairman Jerome Powell said this week that top officials at the central bank were “monitoring” the trade negotiations as they deliberate whether any changes are warranted to monetary policy.
The weak jobs growth in May “makes a cut more likely, and supports our view that the trade tensions will ultimately slow growth enough for the Fed to respond,” the Bank of America economists wrote.