Strong US Jobs Data Revive Rate-Hike Bets Ahead of Fed’s June Meeting

A stronger-than-expected US labor market is reviving the prospect of another interest-rate increase by the Federal Reserve.

Bloomberg reported on June 5 that recent US employment data showed continued strength, leading markets to start pricing in the possibility of a rate hike later this year. That makes the Federal Open Market Committee’s June 16-17 meeting a key inflection point.

The Labor Department said May nonfarm payrolls increased by 172,000, far above the market forecast of 85,000. April payroll growth was also revised up to 179,000 from 115,000.

The resilient labor market is seen as giving the Fed more room to focus on price stability rather than slowing growth. Markets are also watching closely for the message Kevin Warsh, who became Fed chair last month, will deliver at his first policy meeting.

Recent inflation data have added to the Fed’s challenge. The central bank’s preferred inflation gauge rose 3.8% in April from a year earlier, the highest level since 2023. Higher energy prices linked to conflict in the Middle East have been cited as a key driver.

Markets are already reflecting the possibility of higher rates. BNP Paribas expects the Fed to begin raising rates in December and has flagged the potential for additional increases after that.

Hawkish comments have also continued from within the Fed. Governors Lisa Cook and Christopher Waller, who had argued for rate cuts last year, recently said inflation has remained higher than expected and raised the possibility of a rate increase.

Beth Hammack, president of the Federal Reserve Bank of Cleveland, said it is reasonable to keep rates unchanged for now, but policy action may be needed if recent trends continue.

The Fed will also release a new Summary of Economic Projections at this FOMC meeting. Markets expect officials to present higher inflation and policy-rate forecasts than they did in March.

Meanwhile, market research firms expect the US consumer price index for May, due next week, to rise 4.2% from a year earlier. That would mark the fastest increase in more than three years.

Neil Dutta, head of economics at Renaissance Macro Research, said the Fed could abandon its previous easing bias and shift back toward tightening if strong hiring and high inflation combine to create what he called a "boomflation" environment.