Hike rates

US jobs report means the Fed will hike rates sharply

US jobs report means the Fed will hike rates sharply

Newslooks – WASHINGTON (AP)

For most Americans, Friday September jobs report was good news: companies continued to hire at a brisk pace, unemployment fell to its lowest level in half a century and the average wage rose.

Yet for the Federal Reserve, the jobs numbers highlight how little progress it is making in its fight against inflation. With the Fed more likely to continue to rapidly increase borrowing costs, the risk of recession will also increase.

The employers did slightly reduce hiring last month, and average wage gains have slowed. But economists say neither is falling fast enough for the Fed to slow its inflation-fighting efforts.

FILE – Construction workers fix the frame of a new building, Monday, May 3, 2021, in Miami. The number of jobs available in the United States fell in August 2022 compared to July, as companies became less desperate for workers, a trend that could calm chronically high inflation. (AP Photo/Marta Lavandier, File)

As a result, another sharp three-quarter point rate hike – a fourth in a row – is likely at the Fed’s next meeting in November. (The central bank typically raises rates in quarter-point increments.)

The Fed’s rate hikes are aimed at cooling the economy and controlling inflation. The increases have, in turn, led to higher borrowing costs across the economy, including for homes, credit cards and business loans.

Rising interest rates in the United States rattled global markets and caused a sharp drop in US stock prices. Friday, stock prices fell againwith the S&P 500 index down almost 3%.

Yet as it struggles to overcome the worst inflation fight in four decades, the Fed is focusing much more on the labor market than on financial markets. Underlying measures of inflation indicate that prices continue to rise.

“The Fed still has some work to do to cool the labor market and reduce inflationary pressures from it,” said Sarah House, an economist at Wells Fargo.

Here are five ways Friday’s report will influence the Fed as it decides how fast to keep raising rates:

A LOWER UNEMPLOYMENT RATE DOES NOT HELP

For the Fed, the fall in the unemployment rate, from 3.7% to 3.5%, was mixed at best. The rate fell because more Americans found jobs and some unemployed people gave up looking for work, meaning they were no longer counted as unemployed.

A smaller pool of job seekers will keep pressure on employers to offer higher wages in order to attract and retain employees. Businesses will pass at least some of these higher costs onto consumers, raising prices and fueling inflation.

Fed officials have signaled that the unemployment rate needs to be at least 4% to slow inflation. Some economists say the unemployment rate should be even higher. Either way, the low unemployment rate points to more rate hikes to come.

September’s generally strong jobs report also underscored the view of many Fed policymakers that the US economy is healthy enough to withstand higher rates. That means they may not see a reason to slow their rate hikes any time soon.

HIRING IS SLOWING BUT NOT ENOUGH

The Fed wants to see a better balance between supply and demand in the labor market. This would mean a combination of more people looking for work and less demand for workers.

There has been only limited progress on both sides. This week the government announced that the number of available jobs has fallen sharply in August and is about 15% lower than the record high reached in March. Yet the number of openings remains at historically high levels.

Fed Board of Governors Christopher Waller noted on Thursday that economists forecast a gain of 260,000 jobs in September — fairly close to the actual number in Friday’s report.

Such an increase “would be lower than the past few months but very healthy compared to past experience,” Waller said. “As a result, I don’t expect tomorrow’s jobs report to change my view that we should be 100% focused on reducing inflation.”

TOO FEW AMERICANS LOOKING FOR WORK

An increase in the number of people competing for jobs would make it easier for employers to fill positions without offering higher wages. This would reduce inflationary pressures without requiring many layoffs.

“More labor supply is the painless way out of the inflationary pressures currently coming from the labor market,” House said.

Yet Friday’s report shows there has been little such progress in recent months. The proportion of Americans working or looking for work fell to 62.3% in September, about where it has been all year.

Fed officials have said in recent speeches that they don’t expect many more people to return to the workforce. Many older workers who retired early in the past two years will likely remain on the sidelines.

A reduced supply of workers means that the Fed would feel compelled to reduce the need for workers even more than it otherwise would. That would suggest bigger rate hikes are in store.

THERE ARE STILL A LOT OF CATCH-UP HIRES

Another challenge for the Fed is that even if it tightens credit at the fastest pace in 40 years to slow demand, many businesses may need more workers just to meet modest consumer demand. Such pressure could also force the Fed to raise rates to cool demand.

Two weeks ago, for example, Jess Pettit, an executive at the Hilton hotel chain, told Fed officials at a roundtable that consumer demand was not the main driver of hiring. his company. Instead, it primarily tries to maintain a minimum staff base amid fierce competition from other hotels for a smaller pool of workers.

Waller asked him, “So no matter what we do for demand, you’re always going to have a demand for labor?”

“I think so, it is,” Pettit replied.

WAGES HAVE DECLINED SLIGHTLY

For the Fed, the only bright spot from Friday’s jobs report may be that wage growth has slowed, although it’s unclear if that trend will continue.

Hourly wages increased in August and September at an annual rate of about 3.6%, compared to about 5.6% at the start of the year. If it continues, this slowdown could ease the pressure on the Fed to tighten credit. Wage growth at this level is roughly in line with the Fed’s 2% inflation target.

Steven Friedman, senior economist at investment firm MacKay Shields, said the payroll numbers are “a silver lining for the Fed” if the same pace continues.

But “I don’t think the Fed thinks they have the luxury of waiting for that,” Friedman said.

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