A surprisingly strong June jobs report confirmed that the US labor market remains historically strong even as recession warnings peak. But this development, while good news for the Biden administration, should keep the Federal Reserve on its aggressive path of raising interest rates as it tries to cool the economy and slow inflation. .
Today’s world, characterized by rapid price increases, is complicated for economic policymakers, who fear that an overheated labor market could exacerbate persistent inflation. Instead of seeing the skyrocketing demand for labor as an absolute good, they hope to bring about a gradual and controlled slowdown in hiring and wage growth, both of which remain exceptionally strong.
Friday’s report offered early signs that the desired cooling is setting in as job gains and wage increases moderated slightly. But hiring and incomes have remained strong enough to reinforce Fed officials’ view that the labor market, like much of the economy, is out of whack: Employers still want far more workers than they need. there are none available.
The new data will likely keep central bankers on track for another rate hike when they meet later this month as they try to rein in consumer and business spending and bring back the economy in equilibrium.
“We’re starting to see these early signs of a downturn, which is what we need,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with CNBC after the report was released. Still, he called the pay data “only” reassuring and said “we’re starting to move in the right direction, but there’s still a lot to do, and we’ll have to see a lot more.”
Fed officials began raising interest rates from near zero in March in a bid to make borrowing of all kinds more expensive. Last month, the central bank raised its key rate by 0.75 percentage points, the biggest increase since 1994.
Central bankers typically only adjust policy in quarter-point increments, but they have picked up the pace as inflation is proving worryingly fast and stubborn. While Fed policymakers said they would debate a move between 0.5 and 0.75 percentage points at their July 26-27 meeting, a chorus of officials have said in recent days that they would support a second move of 0.75 percentage points given the speed of inflation and strength. of the labor market.
As the Fed attempts to rein in the economy, Wall Street economists have warned it could instead plunge it into a recession — and the Biden administration has pushed back on claims that one is already coming. A slump in global growth data, a slump in the housing market and a slowdown in factory orders fueled fears that America was on the verge of a slowdown.
The jobs data powerfully contradicts this narrative, as a shrinking economy typically does not create jobs, let alone at the current brisk pace.
Mr Biden celebrated the report on Friday, saying “our critics have said the economy is too weak” but that “we’ve still created more jobs in the last three months than any administration in almost 40 years”.
Private sector voices agreed that the jobs report showed an economy that did not appear to be collapsing.
“Wage growth remains high and job loss rates are low,” wrote Nick Bunker, director of economics research at jobs site Indeed, in a reaction note. “We will see another recession one day, but today is not that day.”
The state of employment in the United States
Job gains continue to maintain their impressive pace, easing fears of an economic slowdown but complicating efforts to fight inflation.
The contradictory timing of the economy – with rapidly rising prices, shrinking economic growth and an unemployment rate near a 50-year low – posed a challenge to Mr Biden, who struggled to convey sympathy to consumers struggling with higher prices while seeking credit for the strength of the employment recovery.
Mr Biden’s approval ratings have fallen as price growth has accelerated. Confidence has taken a particularly severe hit in recent months amid rising gasoline prices, which averaged above $5 a gallon earlier this summer.
On Friday, Mr. Biden stressed that tackling inflation was his top economic priority while praising recent progress in the labor market.
“I know times are tough,” Biden said, speaking in public remarks. “The prices are too high. Families are facing a cost of living crisis. But today’s economic news confirms the fact that my economic plan is moving this country in a better direction.
But unfortunately for the administration and for workers across America, the fight against high prices will likely come at a cost to the labor market.
As price hikes unsettle consumers at the gas pump and in the grocery aisle, the Fed believes it needs to get inflation under control quickly to put the economy on a path of healthy, sustainable growth .
The Fed’s tool to achieve this long-term positive outcome works by causing short-term economic hardship. By making money expensive to borrow, the central bank can slow down home buying and business expansion, which in turn will slow down hiring and wage increases. As businesses and families have less money to spend, the theory goes, demand will better align with supply and prices will stop skyrocketing.
Officials expect unemployment to eventually rise as rates rise and the economy weakens, although they hope it will rise only slightly.
Fed policymakers are still hoping to engineer what they often call a “soft landing,” in which hiring and compensation gains gradually slow, but without plunging the economy into a painful recession.
But getting there won’t be easy – and officials are ready to get tougher if that’s what it takes to get inflation under control.
“Price stability is absolutely essential for the economy to realize its potential and sustain maximum jobs over the medium term,” John C. Williams, president of the Federal Reserve Bank of New York, said in a speech on Friday. in Puerto Rico. “I want to be clear: this is not an easy task. We must be determined and we cannot fail.
Stocks fell after the jobs figures were released, likely because investors saw it as a sign that the Fed would continue to restrain the economy.
“To me, the tremendous momentum in the economy suggests we can move 75 basis points into the next meeting and not see a lot of prolonged damage to the wider economy,” Bostic said. Friday.
Fed officials are watching payroll data in particular closely. Average hourly earnings rose 5.1% in the year to June, down slightly from 5.3% the previous month. Salaries for non-executives increased by 6.4% compared to the previous year.
Although this pace of growth is slowing somewhat, it is still well above normal and could keep inflation high if it persists, as employers charge more to cover rising labor costs.
“Wages aren’t primarily responsible for the inflation we’re seeing, but going forward they would be very important, especially in the service sector,” Fed Chairman Jerome H. Powell said at the conference. his press conference in June.
“If there’s no price stability, the economy really won’t work the way it should,” he later added. “It won’t work for people – their salaries will be eaten up.”
Inflation has been above the Fed’s target for more than a year. The personal consumption expenditure index excluding food and energy prices, which the Fed monitors to get a sense of underlying inflation trends, has climbed 4.7% in the year to ‘in May.
And it is the least dramatic of the main measures of inflation. Prices climbed 8.6% in the year to May, as measured by the consumer price index, and the June figure, due out next week, could show further recovery .
Central bankers are increasingly concerned that high costs will feed through into consumers’ inflation expectations, making price increases harder to stifle. Once workers and businesses begin to believe that prices will rise rapidly year on year, they may change their behavior, seeking bigger wage increases and more regular price adjustments. This could make inflation a more permanent feature of the US economy.
The Fed wants to prevent this outcome. If he raises rates by 0.75 percentage points this month, it would bring interest rates back to a range of 2.25-2.5%, and officials have signaled they will likely raise costs borrowing by another percentage point by the end of the year.
“Supply and demand will be rebalanced and inflation will return to our longer-term 2% target,” Williams said. “It may take a while and could be a bumpy road.”
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