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| Photo Credit: AP. |
WASHINGTON (AP) — 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.
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.
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’S STILL A LOT OF CATCH-UP HIRING
Another
challenge for the Fed is that even as it’s 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 labor?”
“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’s not clear if that trend will continue.
Hourly wages
rose in both August and September at about a 3.6% annual rate, down from about
5.6% 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% 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.