Investing.com - A solid jump in nonfarm payrolls for January combined with very tepid wage growth could put the Federal Reserve back into a quandary about whether monetary policy tightening is needed.
Nonfarm payrolls rose by 304,000 in January, smashing consensus expectations for the creation of just 165,000 positions. But average hourly earnings, a gauge of wage inflation, rose just 0.1% on the month, below forecasts of 0.3%.
“Another huge beat for the headline number," said Allianz (DE:ALVG) Chief Economist Mohamed El-Erian. "Again the economy created almost twice as many jobs as consensus expectations for the month."
A surprise increase in the jobless rate to 4.0%, could be considered a temporary effect from the recent U.S. government shutdown.
“The impact of the partial federal government shutdown contributed to the uptick in these measures,” the Bureau of Labor Statistics explained in its report.
But there was also a big downward revision to the previous month's payrolls. December's payroll rise of 312,000 was revised down to 222,000. November's went up to 196,000 from 176,000.
The Fed decided to hold interest rates steady this week and emphasized that economic cross-currents suggested that “patiently awaiting greater clarity” was the best stance.
Markets have remained skeptical that the Fed will follow through with two further rate hikes this year as policy-makers predicted back in December.
Even following the release of the strong jobs numbers, the probability of a rate cut going out to October rose, according to Investing.com's Fed Rate Monitor Tool.
El-Erian commented that the jobs reports should “counter concerns about a significant growth slowdown and put an end to talk of a recession” this year.
It will also “fuel debate on whether the Fed went too far in pleasing markets,” he said.
James Knightley, chief international economist at ING, noted that “the Fed is on pause, but the case for rate hikes will persist”.
“With worker pay on the rise and employees feeling secure in their jobs, consumer spending will likely remain firm while adding to inflation pressures in the economy. Fed Chair Jerome Powell talked of economic and market (cross-currents), justifying a pause from the Federal Reserve, but if we can get better news on US-China trade relations, that will lift some of the global gloom,” Knightley said.