Not that America’s central bankers needed any more reasons to speed up the pace of interest 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 a two-year low of 3.6 percent.
These are all signs of a strong labor market with little need for the kind of super easy monetary policy that the Fed is currently running and has started to loosen.
“A very tight labor market just got even tighter,” wrote Kathy Bostjancic and Lydia Boussour of Oxford Economics.
Fed policy rate-linked futures contracts fell after the jobs report as expectations intensified that the Fed will grow in the next three Fed meetings, rising half a percentage point each time to deal a blow. more decisive to price pressures. .
Rate futures contracts reflect probability bets that the policy rate will end the year in the range of 2.5 percent to 2.75 percent, with a one-in-three chance of going higher still. Either way, that’s high enough to stunt growth.
Just two weeks ago, the Fed raised interest rates by a quarter percentage point in its first policy tightening in three years, signaling continued rate hikes to rein in inflation at a 40-year high and rising.
With an average hourly wage that is 5.6 percent higher than a year earlier, the March labor market report reflected strong demand for workers despite rising borrowing costs that central banks say it may also contain a warning sign of a “wage price spiral” that could make inflation even worse.
At their mid-March meeting, policymakers had projected a year-end monetary policy rate of around 1.9 percent. Since then, several, 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 Friday that he doesn’t see much risk in using “a few” half-point rate hikes to neutralize borrowing costs sooner. , as long as the goal is not to raise rates much faster and push them much higher.
The concern would be that the Fed ends up tightening too much, pushing the economy into recession. Historically, it has been rare for the Fed to have avoided such an outcome once the unemployment rate falls as low as it does now.
With inflation looking set to accelerate further after Russia’s invasion of Ukraine sent oil prices soaring and an outbreak of COVID-19 in China threatens to further damage already strained supply chains, reining in inflation is ” essential” to maintaining a strong labor market, the Fed’s Powell has said.
The Federal Reserve targets 2 percent inflation through a measure known as the personal consumption expenditures price index. In February, that measure jumped to 6.4 percent.
Policymakers don’t want to risk ever-higher price expectations becoming embedded in American family and business psychology. The rate increases are designed to curb demand and mitigate that risk.
Furthermore, policymakers have argued, the labor market has reached the full-employment standard and is strong enough to withstand the kind of fairly rapid withdrawal of support they are contemplating.
Friday’s report offered more water for that argument. The unemployment rate was “little different” from the pre-pandemic rate of 3.5 percent, the report’s authors said.
And it helps confirm the Fed’s hope that workers sidelined by the pandemic will find their way back into the workforce as COVID-19 cases decline.
Labor force participation of workers in their “prime” years aged 25 to 54 rose to 82.5 percent, the highest level in two years. Most industries are now at or near their pre-pandemic level of employment
Overall US employment is still 1.6 million below the pre-pandemic level, the report showed.
But Fed policymakers increasingly see that deficit as likely to be filled slowly and not likely to be rushed by keeping rates low.