Major U.S. economic data released, and the Federal Reserve's rate cut this year is in doubt! Will they turn to rate hikes? Goldman Sachs provides four reasons: "Very unlikely"

Each Daily Reporter｜Gao Han    Each Daily Editor｜Jin Mingyu Wang Jiaqі Du Hengfeng

In local time on April 3, the U.S. Bureau of Labor Statistics released March nonfarm payroll employment data that significantly exceeded market expectations: 178k new jobs were added, far above the roughly 65k widely expected by the market, and it also sharply contrasts with the 92k-job drop in February.

Meanwhile, the energy shock has heated up rapidly. The nationwide average gasoline price in the U.S. rose to $4.02 per gallon, with some regions breaking $5, and California reaching as high as $5.88 per gallon.

Two seemingly contradictory signals are pointing to the same question at the same time—whether the Federal Reserve will pivot to rate hikes.

“Outstanding” nonfarm data is hard to call a recovery

Rate-cut expectations for the Fed have fallen to zero

In local time on April 3, the U.S. Bureau of Labor Statistics showed that in March, the nonfarm employment population increased by 178k, far exceeding the 65k forecast by economists surveyed by Bloomberg. It was the largest single-month gain since the end of 2024. February employment fell by 92k (revised down to a decline of 133k).

Meanwhile, the unemployment rate in March fell to 4.3%, below the expected 4.4% and also better than the prior reading of 4.4%.

The strong rebound in March quickly triggered market discussions about whether the U.S. economy is strengthening again.

In a newly released research note, Everbright Securities said that the “eye-catching” employment data for March was more based on a low base in February, and the sustainability of the rebound remains to be observed. On the one hand, more than 30k medical personnel participated in a strike in February. As the strike was resolved, the medical services sector added 90k jobs in March, which was the main driver of this nonfarm data. On the other hand, a large-scale winter storm swept across the U.S. Northeast at the end of February. As the weather warmed, employment in the construction and leisure and hospitality industries also rebounded noticeably.

Therefore, the rise in March nonfarm employment is, to a large extent, a “technical repair” of short-term disruptive factors.

Everbright Securities also emphasized that the February employment data was revised further downward—from an initial estimate of -92k to -133k. Nonfarm data revisions have been frequent over the past year or so, and most have been downward revisions. This leaves open the possibility that the initial nonfarm data for this release could also be revised downward.

In addition, the current U.S. labor market is in a new normal of “low hiring and low layoffs.” The further deterioration of the situation in the Middle East in March, and the rapid climb in oil prices, could both break the current “cold equilibrium” in the jobs market, leaving a risk that employment data could worsen again in the future.

Against this backdrop, after the March data was released, the market had basically erased expectations of Fed rate cuts within the year. Before the outbreak of the Middle East conflict, the market had at one point priced in a loosening expectation of 55 basis points.

Janney Montgomery Scott’s Chief Investment Strategist Mark Luskin said that overall, this data is steady enough to allow the Federal Reserve to keep rates on hold. “The data revisions weaken how impressive the numbers look, and at the same time wage growth is slowing, which may indicate some easing in the labor market. But the key point is that the unemployment rate has not risen sharply, which is a positive signal for the economy.”

The CME “Fed Watch” tool shows that currently the market believes the probability that the Fed will raise or cut rates at the April 28–29 Federal Open Market Committee (FOMC) meeting is basically zero, and there is more than an 80% chance that the Fed will keep rates unchanged for the rest of this year.

Nationwide average gasoline price breaks $4:

Rate-hike expectations are heating up, but the bar remains high

If employment data has suppressed the room for rate cuts, then the surge in oil prices has reignited the market’s discussion about rate hikes.

Since the outbreak of the Middle East conflict on February 28, the global energy supply landscape has been significantly disrupted. The Strait of Hormuz, a key passage for transporting about one-fifth of the world’s crude oil, has currently been closed to most oil tankers, directly driving a sharp rise in international crude oil prices. Since the conflict began, the benchmark oil price has risen by more than 50% in cumulative terms.

Multiple institutions have issued forecasts that oil prices will rise further. Société Générale believes that a prolonged war pushing oil prices to $150 per barrel is a “credible” outcome. Most analysts expect crude prices to reach $130–$140 per barrel.

Macquarie Bank in Australia, meanwhile, predicts that if the war lasts until June, crude oil prices will reach $200 per barrel. This also does not yet account for risks that could come from possible attacks on the closure of the Strait of Hormuz layered with the risks related to Qaher Island (most of Iran’s crude oil production exports pass through it), or disruption of another important trade route, the Strait of Mandeb.

U.S. domestic energy prices have already responded quickly.

The American Automobile Association shows that as of March 31, the nationwide average regular gasoline price rose to $4.02 per gallon, the highest in nearly four years. Compared with the period before the U.S. and Israel launched military actions against Iran on February 28, the increase is more than $1. Some states have already broken $5, with California the highest at $5.88 per gallon.

In addition, the nationwide average regular diesel price is approaching $5.45 per gallon, per Philipp Lazarini. Before the U.S.-Israel-Iran war broke out, the average diesel price was about $3.76 per gallon.

As oil prices rise, the increase is transmitted through the transportation, production, and consumption chain, intensifying concerns in the market about a rebound in inflation. This is also an important backdrop for the market’s renewed recent discussion about whether the Federal Reserve might restart rate hikes.

From market pricing, this concern is already reflected. In its latest research note, Goldman Sachs said that the implied probability of rate hikes in 2026 within the interest rate market is about 45%, up significantly from 12% before the conflict. At the same time, however, it emphasized that this probability may be overestimated, and rate hikes are still not the baseline scenario.

First, in terms of the nature of the shock, the current rise in oil prices is a supply-side shock, and its magnitude and scope are weaker than those of typical inflation events in history. Compared with the 1970s oil crisis, when the economy depended more on oil, and compared with the global supply chain disruptions in 2021–2022, this shock has a more limited coverage. Therefore, its sustained upward push on overall inflation may be relatively weaker (although the outlook for both the scale and scope remains uncertain as the fighting continues).

Second, the current state of the economy at the start of the cycle means that inflation is unlikely to show a significant second-round pass-through effect. Medium- to long-term inflation expectations are firmly anchored, which is very different from the 1970s situation. During 2021–2022, inflation expectations also remained stable. This is one of the reasons the Fed’s FOMC does not need to curb inflation by triggering a recession, as it did in the 1980s.

Third, the initial policy baseline makes the likelihood of rate hikes lower. The federal funds rate is about 50–75 basis points higher than the median estimate of the neutral rate used by the FOMC, and it is broadly consistent with the level suggested by standard policy rules. In addition, since the conflict began, financial conditions have tightened by nearly 80 basis points, further reducing the need for additional tightening policy. By contrast, the federal funds rate in early 2022 was zero, while in the 1970s it was far below the neutral rate and the levels suggested by policy rules.

The current monetary policy is close to neutral, unlike the 1970s and 2021–2022

Fourth, based on historical experience, the Fed usually does not tighten policy solely because of an oil price shock. In speeches by Fed officials, the link between oil price shocks and tightening monetary policy is mentioned as not being significant (but in speeches by European Central Bank officials, this linkage is much stronger). Similarly, Fed officials have not systematically changed their federal funds rate forecasts due to changes in oil prices.

Most institutions also believe that the likelihood of the Fed turning to rate hikes in the near term remains limited.

Everbright Securities noted that compared with February, the “eye-catching” employment data in March reduced the urgency of rate cuts in the short term. To respond to the oil supply shock, the Fed is not in a hurry to cut rates, but the threshold for rate hikes is also high.

Galaxy Securities also said that although there are upside risks to inflation in the short term, over the long run, the probability of “temporary” inflation is still higher than persistent inflation. “We still believe the probability of more than one rate cut occurring in 2026 is high, and there is no need to worry about the Fed switching to rate hikes.”

(Disclaimer: The article content and data are for reference only and do not constitute investment advice. Investors act on this at their own risk.)

Reporter｜Gao Han

Editor｜Jin Mingyu Wang Jiaqі Du Hengfeng

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