What Does Rising US Employment Mean for Rate Hikes and the Strength Dollar?

An acceleration in US jobs levels could give support to further rate hikes from the Federal Reserve, while also boding well for its efforts to curb surging inflation without triggering a recession. 

Non-farm payrolls increased by 372,000 in June according to data released on Friday by the US Bureau of Labor Statistics. The print was well ahead of the estimate of 250,000 from Dow Jones, indicating that jobs growth continues to run strong as of mid-2022.  

The unemployment rate stood at 3.6% in June, unchanged from the previous month and pointing to the strong health of the US economy, despite rampant inflation and the ongoing impacts of the Covid pandemic.  

The latest round of robust jobs data indicates that the Fed could still have room to raise interest rates to stamp out inflation without tipping the US economy into a full-blown recession.  

Central banks like the Federal Reserve can influence the performance of the economy by making adjustments to target interest rates, which in turn influences the cost of credit throughout the rest of the financial system.  

Increases to interest rates can slow down economic activity by raising the cost of borrowing, while cuts to interest rates have the opposite effect, potentially spurring economic activity by reducing the cost of credit.  

The Fed has been raising interest rates since April in order to contain the surging inflation which has beset the US economy since the start of 2022, and seen growth in the consumer price index (CPI) rise to a 40 decade high of 8.6% by May.  

Raising interest rates can also have the effect of tipping economies headfirst into recession however, as an excessive slowdown in commercial transactions can eventually lead to a decline in output.  

As of last Thursday bond markets had priced in a near-term economic downturn. The 2-year US Treasury yield stood at 3.125%, while the 10-year yield was at 3.097%, creating an inverted yield curve which is generally considered to be a portent of recession.  

The positive jobs figures may change minds on the market however. If the US economy is in better health than previously anticipated, the Federal Reserve may be able to continue to raise interest rates without slowing down growth to the point where a recession takes place.  

The Fed appears determined to stem inflation irrespective of the near-term economic impacts, with Jerome Powell recently stating that he was willing to risk a recession in order to curb CPI gains.  

The Fed has already raised its target interest rate by 150 basis points since the start of the year, while the latest round of Federal Reserve meeting minutes showed that it is leaning towards another 75 basis point hike this month. 

“I’m definitely in support of doing another 75 basis point hike in July,” said Fed governor Christopher Waller on Thursday, who also pointed to the possibility of a 50 basis point hike in September, to be followed subsequently by 25 basis point hikes if inflation can be contained.  

The hawkishness of the US Fed has provided tremendous support to the US dollar in 2022, by raising the yields on dollar-denominated assets compared to those of other major currencies whose central banks have remained comparatively dovish, including the European Central Bank (ECB) and the Bank of Japan (BOJ). 

The US dollar index currently stands at just over 107, for an increase of around 11% year-to-date.