What Friday’s jobs report means for Fed’s inflation fight


WASHINGTON (AP) — For most Americans, Friday’s September jobs report was welcome news: Businesses continued to hire at a brisk pace, unemployment fell back to a half-century low and average wages rose.

Yet for the Reserve, the employment figures highlight how little progress they are making in their fight against . With the Fed more likely to continue to rapidly raise borrowing costs, the risk of recession also rise.

Employers pulled back slightly on hiring last month, and average wage increases slowed. But economists say neither is falling fast enough for the Fed to slow its inflation-fighting efforts.

As a result, another hefty three-quarter point rate hike – a fourth in a row – is likely at the Fed’s next meeting in November. (The central bank usually charges rates in quarter-point increments.)

The Fed’s interest rate hikes are intended to the economy and tame inflation. The increases, in turn, led to higher borrowing costs across the economy, particularly for home, credit card and business loans.

Rising US interest rates rattled global markets and caused a sharp drop in US stock prices. Stock prices fell further on Friday, with the S&P 500 index down nearly 3%.

But as it struggles to overcome the worst inflation battle in four decades, the Fed is far more focused on the labor market than the financial markets. Underlying measures of inflation suggest that prices are still rising.

“There is still more work for the Fed to do to cool the labor market and reduce the resulting inflationary pressures,” said Sarah House, a at Wells Fargo.

Here are five ways Friday’s report will affect the Fed as it decides how quickly 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 work and some unemployed people stopped looking for work, meaning they were no longer counted as unemployed.

A reduced pool of job seekers will put pressure on employers to offer higher pay to attract and retain employees. Businesses will pass on at least some of those higher costs to consumers, thereby raising prices and feeding inflation.

Fed officials have signaled that the unemployment rate should at least 4% to slow down inflation. Some economists say the unemployment rate will be needed even higher. Either way, low unemployment points to more rate hikes to come.

The mostly strong September jobs report also underscored a view among 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.

RENT DEMANDED, BUT NOT ENOUGH

The Fed wants to see a better balance between supply and demand in the labor market. This would mean a combination of more people looking for work and less demand for workers.

There was only limited progress on both sides. The government reported this week that the number of available jobs fell sharply in August and is about 15% below a record high reached in March. Still, 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 forecasting a gain of 260,000 jobs in September — quite close to the actual figure in Friday’s report.

Such an increase “will be lower than in recent months, but very healthy compared to past experience,” Waller said. “As a result, I don’t expect tomorrow’s jobs report to change my view that we need to be 100 percent focused on reducing inflation.”

TOO FEW AMERICANS LOOKING FOR WORK

An increase in people competing for jobs will make it easier for employers to fill positions without offering higher wages. This will reduce inflationary pressures without requiring many layoffs.

“More labor supply is the painless way out of the inflationary pressures coming out of the labor market right now,” House said.

Yet Friday’s report shows that there has been little such progress in recent months. The percentage of Americans either working or looking for work fell to 62.3% in September, about where it has been all year.

Fed officials have said in recent speeches that they do not expect many more people to return to the workforce. Many older workers who took early retirement in the past two years are likely to remain on the sidelines.

A smaller supply of workers means that the Fed will feel compelled to reduce the need for workers even more than it would otherwise. This suggests that more big rate hikes are in the offing.

THERE IS STILL A LOT OF CATCH-UP HIRE

Another challenge for the Fed is that even as it tightens 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 pressures 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 during a roundtable discussion that consumer demand was not the main driver of his ‘s appointment. Instead, it mainly tries to maintain a basic minimum staff amid fierce competition from other hotels for a smaller pool of workers.

Waller asked him, “So regardless of what we do to the demand, you’re still going to have a demand for labor?”

“I think yes, that is the case,” Pettit replied.

WAGES DROPPED SLIGHTLY

For the Fed, the one bright spot in Friday’s jobs report may be that wage growth has slowed, although it’s not clear whether that trend will continue.

Hourly wages rose at about a 3.6% annual rate in both August and September, 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 roughly matches the Fed’s 2% inflation target.

Steven Friedman, senior economist at investment firm MacKay Shields, said the wage numbers 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.

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