US: Federal Reserve May Be Forced to Make Difficult Policy Trade-offs

■ The view that "the labor market is at a low level but remains stable" is beginning to be questioned, but there may also be one-off factors.  

■ If a deteriorating labor market coincides with rising inflationary pressures, the Federal Reserve will be forced to make difficult policy trade-offs. 
 
  The February employment statistics released by the U.S. Department of Labor on the 6th showed that non-farm payrolls (NFP) decreased by 92,000 month-on-month, significantly lower than market expectations (an increase of 59,000) and the previous month (an increase of 126,000), and turned into a decline. The average increase over the past three months was only 6,000, a significant slowdown from the average increase of 50,000 in the previous month. The Dallas Fed estimated in October last year that to maintain labor market equilibrium, a monthly increase of about 30,000 in non-farm payrolls would be sufficient, but the February NFP results have raised questions about the assessment that "the labor market is at a low level but remains stable." At the same time, the unemployment rate rose to 4.4%, up from the previous month (4.3%), also influenced by the Census Bureau's inclusion of new national population estimates in its household survey. However, strikes in the healthcare sector and severe weather such as blizzards have worsened employment in industries such as construction, leisure, and hospitality, and the impact of one-off factors is also quite significant. Therefore, it is still necessary to carefully observe future labor force statistics. 

 
As tensions in the Middle East escalate, the Joint Marine Information Center (JMIC), a multinational naval advisory body, stated that merchant shipping through the Strait of Hormuz has "almost completely ceased." President Trump's statement that ending the fight with Iran must be predicated on unconditional surrender has exacerbated concerns about a protracted military conflict in the Middle East. Meanwhile, the market believes that oil reserves in the Gulf region are nearing their limit, and oil-producing countries may be forced to cut production. As a result, WTI crude oil futures prices, which were around $67 per barrel at the end of February, surged to over $111 today. President Trump stated on the 3rd that the US will provide insurance and naval escorts to ensure safe navigation in the strait, but reports indicate that several shipowners have said that ensuring the safety of their crews remains the top priority. Although WTI prices may fall quickly once signs of the Strait reopening emerge, as long as military tensions in the Strait remain unresolved, market concerns about oil supply will persist. Federal Reserve Governor Waller stated on the 6th that if the surge in gasoline prices eases within a few months, it will not have a significant impact on the future, and he believes that the rise in WTI crude oil prices is unlikely to force the Fed to change its monetary policy. The market currently still expects the US to begin cutting interest rates in September, but if a deteriorating labor market coincides with rising inflationary pressures, the Fed will be forced to make difficult policy trade-offs.