MNI INTERVIEW: Hiring Softer But Not Enough For Fed Rate Cuts

Recent signs of softening in the U.S. job market will likely not provide enough justification for Federal Reserve interest rate cuts this year due to concerns that increased tariffs will prompt a resurgence of inflation, ADP chief economist Nela Richardson told MNI. 

“I see the Fed as having the same wait-and-see approach that almost every economic actor has right now – to just kind of see how things play out,” Richardson said in the latest episode of The FedSpeak Podcast. 

“I think it’s possible to stay where we are, especially if the labor market holds up,” she said, when asked whether rates could be on hold for the rest of the year. 

Richardson says her own firm’s data as well as official government figures indicate the labor market remains resilient but is showing some signs of fraying, including softer hiring and less dynamism. 

WAGE GROWTH

ADP data on wage growth shows it has stabilized but at higher levels than before the pandemic, which could potentially provide fuel for additional inflation. 

“In the 10-year expansion going into the pandemic, wages were still basically crawling. Now wages are upright and walking briskly,” said Richardson, who last month was named a member of the Cleveland Fed’s Financial Markets Advisory Council.

Wage growth for job stayers is running at about 4.5% while rising 7% for workers who change jobs, according to ADP’s figures.

“The way I see it, wages are not strong enough to trigger inflation, but they are strong enough to keep a floor on inflation, on the inflation rate coming down, and perhaps make it come down a little bit slower than the Fed is used to.”

That doesn’t necessarily mean that wage growth is inconsistent with a return to the Fed’s 2% inflation target, but other potentially inflationary forces in the economy – including the reversal of globalization and favorable demographic trends – indicate it could be a tough slog, she said. 

“I think the jury is still out on that point. It’s certainly higher than it had been when inflation was at 2% or below,” said Richardson.

“I do think there is a need for more certainty just on price levels, because prices have been all over the place. They're starting to come down close to a target of 2% but they're not there yet, and we live in a very complex world where all the factors that influence inflation have changed.”

SLOW GRIND

Uncertainty over U.S. trade policy has prompted Fed officials to say they need more time and data before figuring out the direction of the economy, and thus the path of monetary policy. (See MNI POLICY: Fed Cut Impetus Fades Alongside Recession Fears) 

Richardson said it’s too soon to see the effects of tariffs filter through to prices, particularly given the volatility surrounding trade policy announcements.  She’ll be watching for signs that the recent hiring hesitancy and lack of churn starts translating into actual layoffs. 

Richardson does not expect a recession this year, but rather a “slow grind” of economic activity and job gains. She is especially worried about the fate of small businesses with thinner financial cushions to absorb this period of uncertainty. For them, she said, even a Fed rate cut or two might offer little consolation. 

“What does 25 basis points mean to a mom and pop? It means a lot to the markets, it’s a big signal, it’s a big cost of capital, when you’re moving trillions of dollars around. For a Main Street pizzeria or a carwash, what does it actually mean?”