Dive Brief:

• A springtime surge in job gains persisted in May as employers hired 339,000 workers and wage growth — while slowing from a 4.9% annual rate a year ago — rose 0.3% during the month and a still-strong 4.3% during the past 12 months, the Labor Department said Friday. 
• “The labor market continues to be the bright spot in the economy,” American Staffing Association CEO Richard Wahlquist said in an email, noting that U.S. payrolls have grown for 29 straight months. 
• In a sign of potential cracks in the job market, unemployment in May rose to 3.7% from 3.4% the prior month in the biggest monthly gain since April 2020, the Labor Department said. Also, the average work week declined to 34.3 hours, the lowest level since the early months of the pandemic.

Dive Insight:

The report showing robust job growth blurs the recent message from Federal Reserve policymakers suggesting that, during a June 13-14 meeting, they may pause their 14-month campaign of tightening monetary policy.

“As for the Fed: This is a nightmare report,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said Friday in a note to clients.

“Do they stick to [Fed Governor Philip] Jefferson’s clear signal of a June pause, just a couple of days ago, or do they rewrite the script?” Shepherdson said. He predicted no change in the current 5% to 5.25% level in the federal funds rate.

After the release of the May jobs report, many traders in interest-rate futures pulled back from predictions that the Fed will leave rates untouched at its June meeting.

Traders on Friday set 70% odds that the Fed will hold the federal funds rate at its current level this month compared with 80% who made that prediction on Thursday, according to the CME FedWatch Tool. They saw a 30% probability Friday that the central bank will raise the benchmark interest rate by a quarter percentage point.

The Fed has sought since March 2022 to slow the economy, cool the labor market and rein in price pressures with the most aggressive policy tightening in 40 years. Even so, inflation persists at more than the central bank’s 2% target.

Although short of their goal, policymakers including Fed Chair Jerome Powell have indicated in recent weeks that they may suspend raising the main interest rate.

“Since late last year, the Federal Open Market Committee has slowed the pace of rate hikes as we have approached a stance of monetary policy that will be sufficiently restrictive to return inflation to 2% over time,” Jefferson said in a speech Wednesday.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” he said.

“Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” according to Jefferson, who was nominated by President Joe Biden in May to serve as Fed Vice Chair.

The impact from an increase in the federal funds rate can take from a year to 18 months to emerge in the economy.

“It’s time for the Fed to pause rate hikes and take the time needed to allow the effects of the past year’s historically high rate hikes to take hold in all areas of the economy,” Wahlquist said.

Economists at the Fed, along with those at several organizations including Fannie Mae, predict the economy will briefly dip into a mild recession later this year.

Employment of temporary and contract workers has fallen since late 2022, Wahlquist said, noting that “companies are focusing on retaining their current staff while being more selective and strategic about adding flexible and permanent workers.”

The labor force participation rate in May remained at 62.6%, below the pre-pandemic level, the Labor Department said.