Strong Jobs Report Shakes Up Investor Belief in Fed Rate Cuts

Investors began 2024 optimistic about rate cuts, fueling record highs for major U.S. stock indexes. However, a surprisingly strong May jobs report upended those expectations.
The report showed the U.S. economy added far more jobs than expected, with wages also rising higher than anticipated. This raised concerns about inflation and challenged the Federal Reserve’s ability to cut rates this year. Initially, expectations were for as many as seven rate cuts in 2024.
Following the report, experts and investors began expressing doubts about any rate cuts. Treasury yields jumped, and stocks closed lower. Some analysts pointed out that while large-cap stocks remained relatively stable, smaller companies were struggling.
Market sentiment shifted dramatically. Small business owners, previously hoping for cuts, now braced for potential rate hikes and stagflation – a period of stagnant growth with high inflation.
Economists believe the case for rate cuts has weakened. While a growing economy could still lead to higher stock prices, they also see potential for investors to move towards safer assets like Treasury bills if inflation remains high and rates don’t fall.
This shift started before May’s jobs report, with concerns about inflation and the effectiveness of current interest rates. Recent weaker economic data offered some hope for future rate cuts, but global central banks cutting rates elsewhere did little to change the U.S. outlook.