It is not if the US central banks need more reasons to accelerate the pace of rate hikes.
But that’s what they got on Friday, when the latest jobs report from the Bureau of Labor Statistics showed employers added 431,000 to payrolls last month and the unemployment rate fell to its lowest point. in two years is 3.6%.
All of these are signs of a strong labor market without the kind of super-easy monetary policy that the Fed is currently implementing and has begun to recede.
Kathy Bostjancic and Lydia Boussour of Oxford Economics write: “A labor market that is already very tight is even tighter.”
Futures tied to the Fed’s policy rate fell after the jobs report, as expectations intensified that the Fed would be more expansive in its next three Fed meetings, rising by half a percentage point each to deal a more decisive blow to price pressures. .
Futures rates reflect odds on the policy rate at year-end in the 2.5 percent to 2.75 percent range, with about a one-third chance of being even higher. Either way, that’s high enough to slow growth.
Just two weeks ago, the Fed raised interest rates by a quarter of a percentage point in its first policy tightening in three years and signaled continued rate hikes ahead to keep inflation at its highest level in years. 40 years and escalating.
With average hourly wages 5.6% higher than a year earlier, the March labor market report reflects strong demand for workers despite rising borrowing costs, for central bankers, also contained a warning signal of a “wage price spiral” building that could worsen inflation even further.
At the mid-March meeting, policymakers had expected the year-end policy rate to be around 1.9%. Since then, some, including Fed Chairman Jerome Powell, have signaled their willingness to move faster.
Chicago Fed President Charles Evans, who personally prefers the more measured path, told reporters on Friday that he doesn’t see a great risk in using “some” half-point rate hikes to deliver borrowing costs to neutral sooner, as long as the target is not achieved. to raise prices much faster and push them much higher.
People worry that the Fed will tighten too much, sending the economy into a recession. Historically, the Fed has rarely avoided such an outcome once unemployment has fallen as low as it is now.
With inflation likely to accelerate further after Russia’s invasion of Ukraine sent oil prices higher, and the COVID-19 outbreak in China risks further damage to already strained supply chains, the Reducing inflation is “essential” to maintaining a strong labor market, the Fed’s Powell has said.
The Fed sets a 2% inflation target using a measure known as the personal consumption expenditures price index. In February, this measure increased to 6.4%.
Policymakers do not want to risk that increasingly high price expectations will hurt American business and household sentiment. The rate hike is designed to limit demand and mitigate that risk.
In addition, policymakers argue that the labor market has met the full-employment standard and is strong enough to resist the kind of fairly quick-outside support they are contemplating.
Friday’s report provides more support for that argument. The report’s authors say the unemployment rate is “slightly different” from the pre-pandemic rate of 3.5%.
And it helps validate the Fed’s hope that workers who have been sidelined by the pandemic will find their way back into the workforce as COVID-19 cases drop.
The labor force participation rate of workers in the “critical” age group between 25 and 54 years old rose to 82.5%, the highest level in two years. Most industries are now above or close to pre-pandemic employment levels
The report shows that total US employment remains 1.6 million people below pre-pandemic levels.
But Fed policymakers increasingly see that the deficit is likely to be filled only slowly and not easily by keeping interest rates low.
