US economy’s continued strong performance – What does it mean?

US economy added 303,000 non-farm jobs in the month of March, 2024. This is much higher than expectations. The expectation was that it would add just 200,000 non-form jobs in March. Unemployment rate in the month came down to 3.8% from 3.9% in February. Unemployment rate in the country is below 4% for the 26th consecutive month. According to data from The Economist, this is the longest spell of unemployment rate being less than 4% in more than 50 years. US economy has added an average of 231,000 new jobs per month in the past 1 year.

March non-form jobs data has dampened the expectation that US Federal Reserve will start cutting interest rates from June. The expectation is that it will start cutting down interest rates only in the latter part of 2024. The US central bank in an earlier monetary policy meeting this year had hinted that it will go for three interest rate cuts of 25 basis points each in 2024. One basis point is 0.01%. 
 

US Federal Reserve has been increasing interest rates in the past 1.5 years so that the US economy slows down and unemployment rate increases. Higher unemployment rate usually translates into lower wage growth and slowing down of inflation rate. The US central bank is trying to bring down inflation rate in US to its target of 2%. Currently, inflation rate there is around 3.2%.
 

Wage growth in March in non-form jobs, in US, stood at 0.3% over that in February. Average hourly earnings in non-form jobs in the month stood at $ 34.69 per hour. With wages also increasing, along with increase in new jobs created, there is a very high likelihood that US central bank will postpone interest rate cuts beyond June. Bond yields also increased because of this expectation. 
 

Yields on US 10 year treasury bonds increased by 8.9 basis points to 4.398%, after March data came. On two year treasury bonds, it rose by 7.2 basis points to 4.71%. Yields increase when expectations of higher interest rates remaining for some more time, increase. Yields on bonds increase when their prices go down, and vice-versa.
 

If US Federal Reserve postpones interest rate cuts, then other central banks may also follow suit. They too may postpone their interest rate cuts. This includes the Indian central bank, RBI too. In the past 1.5 years, RBI and many other central banks have followed the US central bank in their monetary policy. 
 

Swiss central bank recently cut down its benchmark interest rate. It became the first central bank in a developed country to cut down interest rate, in more than 2 years.