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Over the last couple of months, the forecast number of interest rate cuts in the US has been reduced. One of the factors behind this has been the tightening in the US labour market. The chart below shows the movement in the annual average earnings growth (wages) and the unemployment rate. When the wages growth (blue line) falls, that indicates that the labour market is loosening; this means there are more workers available than jobs. When it rises, it is tightening, meaning there is little availability of workers for open job positions. When the unemployment rate (green line) is rising, the labour market is loosening and tightening when it falls.
You can see in the middle of last year that the labour market was loosening quite a lot, wage growth was declining, and the unemployment rate was rising. Hence, the US Federal Reserve started cutting interest rates. Since September last year, the process has gone into reverse. The unemployment rate started to drop month by month, and latterly wage growth has started to accelerate again. This cannot be due to the interest rate cuts that were implemented last year, it was too soon for them to take effect. It would indicate instead that there must be broader momentum in the US economy. Given these moves in the labour market and the uncertainty surrounding the effect of tariffs and tighter immigration on inflation, it is not surprising that the US Federal Reserve has adopted a ‘wait and see’ approach.
