What Friday’s jobs report means for Fed’s inflation fight
WASHINGTON — 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 Federal Reserve, the jobs figures highlight how little progress they’re making in their fight against inflation. With the Fed more likely to keep raising borrowing costs rapidly, the risk of recession will also rise.
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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 U.S. interest rates have roiled global markets and caused a sharp fall in U.S. stock prices. On Friday, share prices fell further, with the S&P 500 index off nearly 3%.
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 labor 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 RATE DOESN’T HELP:
For the Fed, the decline in the unemployment rate, from 3.7% to 3.5%, 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 onto consumers, thereby increasing prices and feeding inflation.
Fed officials have signaled that the unemployment rate needs to be at least 4% 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 U.S. economy is healthy enough to withstand higher rates. That means they may see little reason to slow their rate hikes anytime soon.
HIRING SLOWS, 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’s 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% 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 percent on reducing inflation.”
TOO FEW AMERICANS 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 labor supply is the painless way out of the inflationary pressures currently coming from the job market,” House said.
Yet Friday’s report shows there’s been little such progress in recent months. The proportion of Americans either working or looking for work dipped to 62.3% in September, around where it’s been all year.
