Another month of stronger-than-expected job growth has left some Wall Street economists at a loss for words as they ponder whether the Fed can cut interest rates at all in the coming months.

Last week, the Department of Labor Statistics reported that U.S. employers added 303,000 workers to payrolls in March, squashing forecasts of just 200,000. The unemployment rate inched lower to 3.8% from February’s 3.9%.

“The data leaves us borderline speechless,” Tom Simons, a U.S. economist at Jeffries, wrote in a note to clients. “We were optimistic about the payroll numbers coming into today based on recent trends in jobless claims and momentum from prior months, but we did not expect to see such strong data around the periphery and within the details.”

Under normal circumstances, Wall Street welcomes strong job growth because it signals the economy is humming along and consumers have steady paychecks they can spend on goods and services.

But in a higher inflation environment, positive economic indicators can throw a wrench into the markets' wheels.

The jobs data “complicates the Fed’s trajectory of maybe cutting interest rates here in the second half,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “What investors are going to have to grapple with now is that the likelihood that the Fed is going to cut at that May or June meetings are probably off the table.”

In addition to strong job numbers, other positive economic indicators include U.S. manufacturing returning to growth after 16 months of contraction, layoffs holding at a low range, and an uptick in labor productivity for the first time in 15 years.

“If the economy is running the way it’s running now through most of this year, then it might be likely that the Fed does not cut interest rates this year,” Saglimbene said.

Saglimbene is not alone.

Inflation expectations and interest rates

Although the Fed left multiple rate cuts on the table at its most recent policy meeting in March, futures traders aren’t buying it. According to CME Group’s FedWatch tool, the odds of a June rate cut are around 50-50, and expectations of multiple reductions have fallen from earlier this year.

“We’re having a number of clients ask us, ‘why is the Fed going to cut rates at all?’ That’s really picked up over the last month or so,” Evan Brown, a portfolio manager and head of multi-asset strategy at UBS Asset Management, told the Financial Times.

For many of UBS’ clients, one of the biggest sources of worry is the apparent reacceleration of inflation.

The consumer price index—America's key inflation barometer—has exceeded expectations for three consecutive months, reaching an annual rate of 3.2% in February. Meanwhile, “core” inflation, which strips away volatile goods like food and energy, has topped forecasts for the last two months.

Both indicators are well above the Fed’s target of 2% and stickier than many economists had expected.

Tracking the full-year rate of inflation shows a moderating trend, but probably not enough to reach the Fed’s target in the near future. Inflation was 4.7% in 2021, 8% in 2022, and 4.1% in 2023.

“The vast majority of people I speak to don’t think inflation will come back to 2% sustainably,” said Jon Day, a portfolio manager at Newton Investment Management. “We think central banks are being too dovish.”

Admittedly, the Fed can’t seem to get its story straight on what comes next.

Caught between a rock and a hard place

Fed Chair Jerome Powell has reassured markets that multiple rate cuts are still possible this year, but other members of the Fed’s brass aren’t on the same page.

Atlanta Fed President Raphael Bostic believes that inflation is declining "much slower than what many have expected." If consumer prices don't change course, he thinks markets would be lucky to get one rate cut this year.

Meanwhile, as the Financial Times reported, Dallas Fed president Lorie Logan thinks it’s “much too soon” to think about rate cuts, and Fed governor Michelle Bowman admitted that progress on reducing inflation “has stalled of late.”

Bostic and Bowman sit on the Federal Open Market Committee (FOMC) this year, which means they vote on interest rates. Logan is slated to join the FOMC as an alternate member in 2025.

If there’s one silver lining for the Fed, it’s that wage inflation appears to be weakening, with average hourly earnings growing at the slowest pace since June 2021. Policymakers may use this as justification to shrug off the latest uptick in inflation.

Although the employment report was hot on the surface, “it was a cooling inflation report and that’s why the market can digest it,” said David Waddell, CEO of Waddell & Associates. “This doesn’t really change anything,” he said, referring to the Fed’s assessment of inflation and its timetable for policy changes.

The FOMC will hold its next interest rate meeting from April 30 to May 1.