January jobs report contains hopeful and worrisome news for the Fed

WASHINGTON — Federal Reserve officials said they are looking to the labor market to cool as they assess what more they need to do to slow the economy and jobs report on Thursday. Six emphasizes that policymakers may still have ways to go.

Employers ramped up hiring in January, adding 517,000 workers. The unemployment rate fell to levels not seen since 1969, and last year’s data revisions showed even stronger job growth in 2021 and 2022 than previously understood — all indications are that demand for labor is exploding.

At the same time, however, wage growth continues to be moderate. Average hourly earnings rose 4.4% on the year, more than forecast in a Bloomberg survey of economists but less than the 4.8% year-on-year increase in December. Wage growth has been decelerating for months, though it is still faster than usual and significantly faster than the pace suggested by Fed officials. there was a time to suggest will be consistent with their 2 percent inflation target.

For central banks, who are trying to reduce inflation at the fastest pace in decades, the report offers both encouraging and unsettling news. On the one hand, a continued slowdown in wage growth is a welcome sign that, if it continues, could pave the way for slower price increases in the future. But Fed policymakers spoke on Friday focused more on new evidence that demand for workers remains strong despite their efforts, suggesting they have more work to do. must do before one can feel confident that inflation will rapidly subside.

“The biggest surprise – and one that received the most signals – was the combination of the last month’s job gains and the correction,” said Thomas Barkin, president of the Federal Reserve Bank of Richmond. in the last year. an interview with The New York Times. “We still have a lot of work to do. Inflation is the guide.”

Fed officials raised interest rates from near zero a year ago to more than 4.5%, opening a new trend. quarter point move just this week. While they signaled much was to come, investors and economists were betting they could stop moving after the next meeting in March.

Strong job numbers raised that expectation. Investors on Friday pencil in another round of rate hikes in May and stocks fell on jobs data as Wall Street braced for a more aggressive central bank. Higher interest rates affect demand by making it more expensive to borrow to buy a home or expand a business.

Fed officials themselves have emphasized that the next round of rate adjustments are coming.

Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said on Fox Business: “Today’s number on the jobs report is an ‘amazing’ number. It doesn’t change the economic narrative, she added: It’s just additional confirmation that the labor market is thriving.

She said Fed December forecast – asking for another two-quarter point rate hike, pushing rates above 5% – remains “a good indicator of where policy is headed at least,” adding that she’s “willing to do a lot more.” more than that if more is needed.”

The Fed often cheers workers up when they get new jobs and raise wages. But officials worry that today’s strong labor market, with strong wage growth, could prevent inflation from returning to their target. As companies raise wages to compete for limited numbers of workers, they can raise prices to cover growing labor bills. In addition, higher incomes can lead consumers to spend more freely.

“The Fed should be happy that they managed to reduce some of the inflation without wrecking the labor market,” said Gabriel Chodorow-Reich, a professor of economics at Harvard. But he added, “I don’t think they’re going to look at this and think the raise is just enough for them to feel comfortable.”

Price increase is started to cool down noticeablyand Fed officials have slow down their growth rate as they wait to see how their cumulative changes are affecting the economy after a year of rapid correction. Wall Street is now waiting for clarity on how senior officials will push up borrowing costs and how long they will let them soar, to ensure that inflation is fully under control. .

Central banks say they are monitoring the job market as they weigh those options. Officials had expected hiring to continue to slow as previous policy changes take full effect, causing the job market to loosen and wage growth to wane.

“This report goes in the wrong direction,” said Mr. Chodorow-Reich.

In particular, officials may doubt that wage growth can continue to decelerate as unemployment hits a modern-era low.

“How far can you push the wage inflation story, if you are getting a job like this?” Neil Dutta, head of US economist at Renaissance Macro Research said. As unemployment falls, he thinks companies will continue to raise wages as they compete for employees.

Still, the gradual recovery in the number of people working or looking for work — and the fact that wages have fallen even as unemployment plummets — may have some Fed officials questioning. whether they need to decelerate the job market so drastically. as they had expected. It is likely that a rebound in worker supply could help fill vacancies, allowing the economy to reach a more stable state in which wages decline slightly without causing severe job losses. important.

“There is still room for the labor market to continue to grow while wages return to a normal trend,” said Mike Konczal, Director of Macroeconomic Analysis at the Roosevelt Institute, a radical research organization. than.

He noted that the Fed’s normal model for thinking about the economy would not predict wages and inflation slowing along with falling unemployment, although that’s what has happened in recent months. .

Despite that, economists insisted on Friday that it was important to wait for more data, in part because Friday’s figures are subject to revision.

“We have to be really careful when reading too much into any one release,” said Kristin J. Forbes, economist at the Massachusetts Institute of Technology and former Bank of England policymaker. which data. But the data clearly shows that the labor market “has legs,” she said, which could make the Fed wary of future wage and price pressures even as inflation eases.

“Things have turned and are moving in the right direction, but we don’t know how long things will stay this way,” Ms. Forbes said. “And we don’t know where they will settle down.”