The Fed spent much of 2022 and 2023 with a narrow focus on inflation as policymakers set interest rates. Prices were rising so fast that rising prices became central banks’ top priority. But now that inflation has subsided, officials are once again factoring the job market more clearly into their decision-making.
One potential challenge? These are very difficult times to assess exactly what monthly labor market data is telling us.
Federal Reserve Chairman Jerome H. Powell said at a press conference Wednesday that job market conditions in the coming months could help the central bank decide whether and when to cut interest rates this year. Ta. He suggested that a significant economic slowdown could prompt policymakers to cut interest rates. On the other hand, if job growth remains rapid and inflation remains stagnant, this combination could deter the Fed from cutting rates in the near future.
But it’s hard to guess which of these scenarios will play out, and it’s harder than usual to determine how hot the job market is today, especially in real time. Fed officials will get the latest numbers Friday morning when the Labor Department releases its April employment report.
Recruitment has been rapid in recent months. Normally, that would make economists nervous that the economy is on the verge of overheating. Businesses compete for the same workers, ultimately risking pushing up wages by pushing up prices.
However, this hiring boom is different. This is due to a wave of immigrants and workers coming from the sidelines of the labor market, which has significantly increased the supply of applicants. This has allowed companies to hire workers without depleting their workforce.
But the rapid increase in the number of employable workers also means that salary growth, the main measure economists use to assess the strength of the job market, can no longer provide a clear signal. There is. Economists will therefore look to other indicators to assess the strength of the job market and predict future momentum. And those measures convey mixed messages.
Wage growth remains very strong in some measures, but appears to be slowing in others. The number of job openings is down, the unemployment rate has recently increased (particularly for black workers), and employment expectations in business surveys are shaky.
The takeaway here is that while this appears to be a strong job market, it’s hard to know exactly how strong. It’s even harder to estimate how much vitality will remain in the coming months. If job growth slows, is it a sign that the economy is starting to tilt, or is it just evidence that employers are finally meeting the demand for new jobs?If job growth remains strong? For example, is that a sign that things are heating up, or is it evidence that the labor supply is still expanding?
“If you look at it through a pre-pandemic lens, the economy looks very strong, maybe very hot,” said Ernie Tedeschi, a Yale Law School scholar who served as a White House economic adviser until this spring. said. But given this increase in labor supply, “maybe we shouldn’t be using a pre-pandemic lens when thinking about the economy at this point,” he said.
Friday’s report is expected to show job growth remains rapid in April. Economists expect employment to rise by 240,000, according to a Bloomberg survey.
This trend continued last year as well. From March 2023 to March 2024, the economy added an average of 247,000 jobs per month. To put this into context, in the year to March 2019, the spring before the coronavirus pandemic began, the economy was adding an average of 167,000 jobs per month.
The Federal Reserve’s policy committee voted this week to keep interest rates unchanged at 5.3%, where they have been since July. Powell said inflation could remain relatively high for longer than previously expected as authorities wait for evidence that inflation is trending further down after months of stagnation. suggested it was high.
But Mr Powell said that while the future path of price growth would be the main driver of policy, employment was also “again in focus” as “inflation is now below 3%”. Ta.
So far, Fed officials aren’t overly concerned about rapid job growth. Powell said Wednesday that the economy was able to achieve even stronger growth in 2023, in part because of a significant expansion in labor supply due to increased immigration and labor market participation.
“Remember what we saw last year: very strong growth, a very tight labor market, and a historically rapid decline in inflation,” Powell said. “We’re not ruling out the possibility that things like this will continue.”
Meanwhile, Powell indicated that Fed officials are keeping a close eye on wage growth. He repeatedly suggested that strong wage increases alone would not be enough to drive the Fed’s decision.
But the Fed chair still signaled that recent wage gains are stronger than the Fed believes are consistent with low and stable inflation over the long term. As companies pay more to attract workers, many economists believe they are likely to raise prices to cover rising labor costs and protect profit margins.
Pay growth continues to be strong thanks to key initiatives. This week’s data showed that a measure of wages and benefits closely monitored by the Fed, called the Employment Cost Index, rose faster than expected in early 2024.
“We’re not targeting wage increases, but over the long term, if wages continue to rise more than productivity warrants, there will be inflationary pressures,” Powell said this week. As for slowing wage growth to a sustainable pace, “we have a way to go about it.”
It is unclear whether job growth and wage growth will continue as rapidly.
Bill Kasko, president of a white-collar employment agency in Texas, said demand for workers remains strong, but employers are becoming more selective amid uncertainty over the outlook for interest rates and the upcoming presidential election. He also noticed that. They wanted to meet more candidates and spend more time making decisions.
“The demand is still there, it’s just not happening as fast,” Casco said.
Mr. Powell made it clear this week that a “meaningful” spike in job losses could prompt the central bank to cut interest rates if employers begin to exit in a more coordinated manner.
Result is? Officials are concerned about continued strong employment numbers, especially when it is difficult to determine whether they indicate a hot labor market or whether it simply indicates change. They appear to be more concerned about a noticeable slowdown in the job market than about growth.
“There’s an asymmetry in how we look at the labor market,” said Michael Feroli, chief U.S. economist at JPMorgan.
Ben Casselman Contributed to the report.
