Friday’s jobs data suggests wages continue to rise rapidly while hiring remains strong — facts that could keep the Federal Reserve cautious as it considers its next interest rate decision.
Fed officials raised interest rates from near zero to a range of 5.25% to 5.5% between March 2022 and last July, but they held borrowing costs steady for months as progress towards a slowdown in inflation has finally materialized.
Central bankers have yet to rule out another rate hike, but most economists believe their next move will be to cut borrowing costs. Fed officials themselves have planned three-quarter point cuts this year, but they have given little indication of when those cuts might begin. Investors bet that reductions could begin as early as March.
Although the Fed is likely to weigh the December jobs report when considering further policy, it is unlikely to be a crucial factor. There will be two more employment reports before the central bank report. March 20 meetingFor example.
But the latest labor market data could give authorities new reason to be cautious before declaring victory. Friday’s jobs report suggests that the economy has retained surprising momentum as 2023 ends. In particular, the average hourly wage increased by 0.4 percent from the previous month and by 4.1 for cent compared to the previous year. That’s faster than the 3.9% expected by a Bloomberg survey of economists.
Jerome H. Powell, Chairman of the Fed, suggested last month that wage hikes at their recent pace — rising about 4 percent compared to the previous year – were probably still slightly warmer than what corresponds to slow and steady inflation. If employers pay their workers more, they might try to raise prices to cover these higher labor costs, which would keep inflation high.
But Mr. Powell noted that wage gains had “gradually attenuated”. The new rise is just one piece of data, but if it persists, it could challenge this trend.
Fed officials also welcome the recent slowdown in job creation, which Friday’s report argues against. Employers added 216,000 jobs in December, more than economists expected, and the unemployment rate remained low.
However, other signs continue to suggest that the job market is cooling somewhat: job postings have declined and employers themselves often report less recruiting stress.
At the Fed’s last meeting, “participants felt that although the labor market remained tight, it continued to balance,” according to the minutes released this week. “Many noted that nominal wage growth had continued to slow overall and that business contacts expected a further reduction in wage growth.”
While the Fed aims for maximum jobs — and generally welcomes strong jobs data — it is currently balancing that goal with its efforts to curb rapid inflation.
