For most Americans, Friday’s September jobs report was welcome news: Businesses kept hiring at a brisk pace, unemployment fell back to a half-century low, and average pay rose.
Yet for the US Federal Reserve, the jobs figures highlight how little progress they are making in their fight against inflation. With the Fed more likely to keep raising borrowing costs rapidly, the risk of recession will also rise.
Employers did pull back slightly on hiring last month, and average wage gains slowed. But economists say neither is falling fast enough for the Fed to slow its inflation-fighting efforts.
As a result, another hefty rate hike of three-quarters of a point – a fourth consecutive one – is likely at the Fed’s next meeting in November. The central bank typically lifts rates in quarter-point increments.
The Fed’s rate hikes are intended to cool the economy and tame inflation. The increases have, in turn, led to higher borrowing costs across the economy, notably for homes, credit cards and business loans.
Rising US interest rates have roiled global markets and caused a sharp fall in US stock prices. On Friday, share prices fell further, with the S&P 500 index off nearly three per cent.
Yet as it struggles to defeat the worst inflation bout in four decades, the Fed is focused much more on the job market than on the financial markets. Underlying measures of inflation indicate that prices are still surging.
“There is still more work for the Fed to do to cool the labour market and reduce the inflationary pressures stemming from it,” said Sarah House, an economist at Wells Fargo.
Here are five ways that Friday’s report will influence the Fed as it decides how fast to continue raising rates.
Lower unemployment doesn’t help:
For the Fed, the decline in the unemployment rate, from 3.7 per cent to 3.5 per cent, was a mixed bag, at best. The rate fell because both more Americans found jobs and some unemployed people gave up looking for work, which meant they were no longer counted as unemployed.
A diminished pool of people seeking jobs will keep pressure on employers to offer higher pay to attract and keep employees. Businesses will pass at least some of those higher costs on to consumers, thereby increasing prices and feeding inflation.
Fed officials have signalled that the unemployment rate needs to be at least four per cent to slow inflation. Some economists say the jobless rate would need to be even higher. Either way, low unemployment points to more rate hikes to come.
The mostly strong September jobs report also underscored a view held by many Fed policymakers that the US economy is healthy enough to withstand higher rates. That means they may see little reason to slow their rate hikes anytime soon.
Hiring has slowed but not by enough:
The Fed wants to see a better balance of supply and demand in the job market. That would mean some 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 reported that the number of available jobs fell sharply in August and is about 15 per cent below a record high reached in March. Yet the number of openings remains at historically high levels.
Christopher Waller, a member of the Fed’s Board of Governors, noted Thursday that economists were predicting a gain of 260,000 jobs in September – quite close to the actual figure in Friday’s report.
Such an increase “would be lower than recent months but very healthy relative to past experience”, Waller said. “As a result, I don’t expect tomorrow’s jobs report to alter my view that we should be focused 100 per cent on reducing inflation.”
Too few Americans are looking for work:
An increase in people competing for jobs would make it easier for employers to fill positions without offering higher wages. That would reduce inflation pressures without requiring many layoffs.
“More labour supply is the painless way out of the inflationary pressures currently coming from the job market,” House said.
Yet Friday’s report shows that there has been little such progress in recent months. The proportion of Americans either working or looking for work dipped to 62.3 per cent in September, around 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 are likely to remain on the sidelines.
A smaller supply of workers means the Fed would feel compelled to reduce the need for workers even more than it otherwise would. That would suggest that more large rate hikes are in store.
There is still a lot of catch-up hiring:
Another challenge for the Fed is that even as it is tightening credit at the fastest pace in 40 years to slow demand, many companies may need more workers just to keep up with modest consumer demand. Such pressure could also force the Fed to raise rates higher to cool demand.
Two weeks ago, for example, Jess Pettit, an executive at the Hilton hotel chain, told Fed officials at a roundtable discussion that consumer demand isn’t the main driver of his company’s hiring. Instead, it’s trying mainly to maintain a basic minimum of staff amid fierce competition from other hotels for a smaller pool of workers.
Waller asked him, “So, regardless of what we do for demand, you’re still going to have demand for labour?”
“I think yeah, that’s the case,” Pettit replied.
Wages fell slightly:
For the Fed, the one bright spot in Friday’s jobs report may be that wage growth slowed though it is not clear if that trend will continue.
Hourly wages rose in both August and September at about a 3.6 per cent annual rate, down from about 5.6 per cent early this year. If sustained, that slowdown could ease pressure on the Fed to tighten credit. Wage growth at that level is roughly consistent with the Fed’s 2.0 per cent inflation target.
Steven Friedman, senior economist at the investment firm MacKay Shields, said the wage figures are “a silver lining for the Fed”, if the same pace continues.
But “I don’t think the Fed feels they have the luxury of time to wait for that”, Friedman said.