Another month, another hot jobs report that has Wall Street wondering when the Federal Reserve will finally cut interest rates.
The US economy added 272,000 jobs in May, racing past economists' predictions for 180,000. The jobless rate rose only slightly to 4%.
The hot jobs report is a double-edged sword for Wall Street. On one hand, a resilient labor market lessens the chance that the economy will tip into recession. On the other hand, it puts long-awaited interest rate cuts from the Federal Reserve on the back burner. Traders are betting that the Fed will ease rates once or twice this year, but not before September, according to the CME FedWatch Tool.
The Fed is expected to hold rates steady at its policy meeting this week, as inflation remains above its 2% target and the economy is slow to cool. Investors are awaiting the latest update to the Fed's Summary of Economic Projections, which contains the "dot plot," or a chart where Fed officials project where rates could head in the future.
Before the Bell spoke with Nate Thooft, chief investment officer of multi-asset solutions at Manulife Investment Management, about when he expects the Federal Reserve to begin cutting rates and what that means for markets.
This interview has been edited for length and clarity.
Before the Bell: Do you think the Fed could lower its projection for three quarter-point rate cuts this year?
There's no doubt that they could.
The Fed's dot plot is still basically saying three, so there's a reasonable chance the dot plot does adjust to two as the possible outcome. But we're in the camp that it's two or three quarter-point [cuts]. I'm not sure it really matters that much in the grand scheme of things, because the big point will be we are going to begin a cutting cycle the way other major global central banks are, whether it's the [European Central Bank] or Bank of Canada.
The US will very likely join them, at least starting the cutting cycle before the end of this year with one to three cuts — our argument is two or three — and then they'll continue to do so through the course of 2025.
Is it concerning that the European Central Bank and Bank of Canada have begun cutting rates before the Fed?
The big thing that we have a lot of anxiety about is currency. (BTB: Higher interest rates tend to strengthen a currency.)
The other central banks can move several quarter-points before the Fed, but they can't go into a completely accommodative state while the Fed is still in a very restrictive state. While the Fed and other central banks generally don't have currency as part of their explicit mandate, they are not void of being aware of those dynamics. So, I do think generally speaking, we believe the dollar is probably close to or right around its kind of peak levels.
But there is a risk that if the Fed has to delay longer and other central banks continue to move forward, it's going to become more problematic for risk assets in general, especially outside the US if the dollar strength continues, like we've seen over the last couple of years. So that's something that we are watching very closely.
Do you think questions about whether the Fed will cut rates later this year could add to stock market volatility as we draw closer to Election Day?
You could see some additional volatility in the US around the election. But ultimately, and our view has always been this case, the US electorate is very split and very equally split. And so you're not going to be likely in a position where either party has significant majorities across the three components of government … which means significant policy changes are not that likely over the coming four years. And overall, that's been a positive for the US for much of its history when it comes to elections not really directly impacting markets much other than some short-term volatility around the election cycle.
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