Strong wage and job growth keeps the Fed on track for a big rate hike

The surprisingly strong June employment report reinforced that the US labor market remains historically strong even as recession warnings have reached their peak. But this development, despite the good news for the Biden administration, is likely to keep the Federal Reserve on its aggressive course to increase interest rates as it tries to cool the economy and slow inflation.

Today’s world of rapid price increases is a complex world for economic policymakers, who worry that an overheating labor market could exacerbate persistent inflation. Rather than viewing the growing demand for labor as a undiluted good, they hope to engineer a gradual and controlled slowdown in employment and wage growth, both of which remain extraordinarily strong.

Friday’s report provided early signs that the needed cooling is taking hold as job and wage increases eased slightly. But employment and earnings have remained strong enough to reinforce the view among Federal Reserve officials that the labor market, like much of the economy, is out of control: Employers still want far more workers than is available.

The new data is likely to keep central bankers on track for another big interest rate hike at their meeting later this month as they try to constrain consumer and business spending and force the economy back into balance.

“We’re starting to see those first signs of slowing, and that’s what we need,” Rafael Bostik, president of the Federal Reserve Bank of Atlanta, said in an interview with CNBC after the report was released. However, he called the wage data “only slightly” reassuring and said we are “starting to move in the right direction, but there is still a lot to do, and a lot more to see”.

Fed officials began raising interest rates from nearly zero in March in an effort to make borrowing of many types more expensive. Last month, the central bank raised the interest rate by 0.75 percentage points, the largest single increase since 1994.

Central bankers usually adjust policy in only quarter-point increments, but they are starting to accelerate as inflation has proven alarmingly fast and stubborn. While Fed policymakers have said they will discuss a 0.5 or 0.75 percentage point move at their July 26-27 meeting, a chorus of officials have said in recent days that they will support a second 0.75 percentage point move given the pace and strength of inflation. in the labor market.

As the Fed tries to put the brakes on the economy, Wall Street economists warned it could push it into a recession instead – and the Biden administration has been avoiding statements that one of them has already arrived. A downturn in aggregate growth data, a downturn in the housing market and a slowdown in factory orders have raised concern that America is on the brink of deflation.

Employment data strongly contradicted this narrative, because the shrinking economy is not adding jobs, let alone at the current fast pace.

the master. Biden celebrated the report on Friday, saying that “our critics said the economy was too weak” but that “we’ve still added more jobs in the past three months than any administration in nearly 40 years.”

Private sector voices agreed that the employment report showed an economy that does not appear to be deteriorating.

“Wage growth remains high and job loss rates low,” Nick Bunker, director of economic research at job site Indeed, wrote in a reaction note. “We’ll see another recession someday, but today is not that day.”

The paradoxical moment in the economy – with prices rising rapidly, economic growth shrinking and the unemployment rate hovering near a 50-year low – posed a challenge to Mr. Biden, who has struggled to express sympathy for consumers suffering from rising prices while seeking credit for the strength of the job recovery.

the master. Biden’s approval ratings plummeted as price growth accelerated. Confidence has taken a particularly clear hit in recent months amid rising gas prices, which topped $5 a gallon on average earlier this summer.

on friday, mr. Biden emphasized that fighting inflation was his top economic priority, while also praising recent progress in the labor market.

“I know times are tough,” Biden said, speaking in public remarks. “The prices are too high. Families face a cost-of-living crisis. But today’s economic news underscores the fact that my economic plan is moving this country in a better direction.”

But unfortunately for management and workers across America, addressing the higher prices is likely to come at a certain cost to the labor market.

With price hikes rattling consumers at the gas pump and in the grocery aisle, the Fed believes it needs to get inflation under control quickly in order to put the economy on a path toward healthy, sustainable growth.

The Fed’s tool works to achieve that long-term positive outcome by inflicting short-term economic pain. By making expensive money to borrow, the central bank can slow home purchases and business expansions, which in turn will slow hiring and increase wages. Since businesses and families have fewer dollars to spend, the theory goes, demand will better match supply and prices will stop skyrocketing.

Officials expect unemployment to eventually rise as interest rates rise and the economy weakens, although they hope it will only rise slightly.

Fed policymakers still hope to engineer what they often call a “soft landing,” in which hiring and payment gradually slow, but without plunging the economy into a painful recession.

But pulling it off won’t be easy — and officials are ready to clamp down hard if that is what it takes to tame inflation.

“Price stability is absolutely essential for the economy to realize its potential and maintain maximum employment over the medium term,” John C. Williams, president of the Federal Reserve Bank of New York, said in a speech in Puerto Rico on Friday. “I want to be clear: This is not an easy task. We have to solve, and we cannot fall short.”

Stocks fell after the employment figures were released, likely because investors saw them as a sign that the Federal Reserve would continue to constrain the economy.

“The massive momentum in the economy to me suggests that we can move at 75 basis points at the next meeting and not see much protracted damage to the broader economy,” El-Sayed said. Bostick said Friday.

Federal Reserve officials are keeping a close eye on wage data in particular. Average hourly earnings rose 5.1 percent in the year to June, down slightly from 5.3 percent in the previous month. Non-manager pay rose 6.4 percent from the previous year.

While this pace of increase is slowing somewhat, it is still much higher than usual — and could keep inflation high if it continues, as employers charge more to cover rising labor costs.

“Wages are not primarily responsible for the inflation we are seeing, but going forward, they will be very important, particularly in the service sector,” Jerome H. Powell, Federal Reserve Chairman, said at his press conference in June.

He later added, “If you don’t have price stability, the economy won’t work the way it’s supposed to.” “It will do no good to people – their wages will be devoured.”

Inflation has been above the Fed’s target for more than a year. The personal consumption expenditures index excluding food and energy prices, which the Federal Reserve monitors for underlying inflation trends, rose 4.7 percent in the year through May.

This is the least dramatic of the major inflation measures. Prices are up 8.6 percent in the year to May according to the Consumer Price Index, and the June number, due next week, may show further recovery.

Central bank officials are increasingly concerned that higher costs will seep into consumer inflation expectations, making it difficult to wipe out price gains. Once workers and companies begin to believe that prices will rise rapidly year after year, they may change their behavior, looking for larger 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 it raises rates by 0.75 percentage points this month, that would push rates to a range of 2.25 to 2.5 percent, and officials have indicated they are likely to raise borrowing costs by another percentage point by the end of the year.

“Supply and demand will be rebalanced, and inflation will return to our long-term target of 2 percent,” Williams said. “This could take some time and could be a bumpy road.”

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