April jobs report likely reinforces Fed's aggressive rate hike plan

The April jobs report revealed another month of robust hiring, likely solidifying the case for the Federal Reserve to pivot toward a mega-sized interest rate hike as it seeks to cool red-hot inflation.

Employers added 428,000 jobs last month, the Labor Department said in its monthly payroll report released Friday, beating the 391,000 jobs forecast by Refinitiv economists. It marked the 12th consecutive month that job gains topped 400,000. The unemployment rate, meanwhile, held steady at 3.6%, the lowest level since February 2020.

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Wages, meanwhile, rose 5.5% in April from the previous year and 0.3% on a monthly basis. While that was a slight moderation from March, it's still nearly double the pre-pandemic average of 3.3%.

The strong job growth, coupled with fast wage growth and the resilience of the U.S. economy in the face of potential threats like rising interest rates and the hottest inflation in 40 years, likely reinforces the Fed's aggressive policy-tightening course as it seeks to soften consumer demand in order to curb soaring prices. 

"This report should reinforce the Fed’s current plan of fighting inflation, without having to give much attention to the labor market, which remains healthy," Sameer Samana, Wells Fargo Investment Institute global market strategist, said. 

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The data comes just two days after the Fed on Wednesday raised its benchmark interest rate by a half point for the first time in two decades as policymakers ratcheted up their fight to tame inflation. It followed a smaller, quarter-point hike in March. The Fed also announced that it will start reducing its massive $9 trillion balance sheet, which nearly doubled in size during the pandemic as the central bank bought mortgage-backed securities and other Treasurys to keep borrowing cheap. 

Collectively, the steps mark the most aggressive tightening of monetary policy in decades as the Fed races to catch up with inflation, which hit a fresh 40-year high in March. It's likely just the beginning of a series of moves designed to curb consumer demand.

In remarks after the two-day meeting, Fed Chairman Jerome Powell told reporters that similarly sized hikes are on the table at future meetings.

"Inflation is much too high, and we understand the hardship it is causing, and we are moving expeditiously to bring it back down," Powell said. "Assuming that economic and financial conditions evolve in line with expectations, there is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings." 

The question now is whether the Fed can successfully engineer the elusive soft landing — the sweet spot between tamping down demand to cool inflation without sending the economy into a downturn. Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending

Economic growth is already slowing, although consumer spending and business investment remain strong. Last week, the Bureau of Labor Statistics reported that the economy unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the U.S. economy was still deep in the throes of the COVID-induced recession.

Powell has argued the labor market and consumer demand are strong enough to prevent a downturn.

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Friday's data may bolster that argument, according to John Lynch, chief investment officer at Comerica Wealth Management.

"Investors need confidence that the Fed won’t raise too aggressively and topple the economy into recession in their fight against inflation," Lynch said on Friday. "Today’s report is balanced and may prove to dampen the extreme volatility of recent days. We’re still not out of the woods, yet a clearing is visible."