US Job Growth Remains Steady
Central bankers have recently begun to make clear that if the labor market softens unexpectedly, they may cut interest rates — a slight shift in their stance after years in which they worked to cool the economy and return to balance a hot job market.
Policymakers have left interest rates at 5.3 percent through July 2023, a decade high that is making it more expensive to get a mortgage or carry a credit card balance. This policy setting is slowly weighing down demand across the economy, with the aim of combating rapid inflation fully under control.
But as inflation cools, Fed officials have made clear they are trying to strike a careful balance: They want to keep inflation under control, but they want to avoid upsetting the labor market. With that in mind, policymakers have signaled over the past month that they would respond to a sudden weakening of the labor market by cutting borrowing costs.
The Fed would like to see more data on cooling inflation “like what we’ve seen recently” before cutting rates, Jerome H. Powell, the Fed chairman, said during a speech this week. “We would also like to see the labor market remain strong. We’ve said that if we saw the labor market weakening unexpectedly, that’s also something that might require a reaction.”
That’s why employment reports are likely to be a key benchmark for central bankers and Wall Street investors, who are eager to see what the Fed will do next.
For years, the Fed had watched the labor market for another reason.
Officials were concerned that if conditions in the labor market remained too tight for too long, with employers struggling to hire and paying ever-rising wages to attract workers, it could help contain inflation. faster than usual. That’s because companies with higher labor costs would probably pay more to protect profits, and workers who earned more would probably spend more, driving up demand.
But recently, job openings have slowed and wage growth has slowed, signs that the labor market is cooling off the boil. This has caught the attention of the Fed.
“At this point, we have a good job market, but not a frothy market,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a recent speech. “Future labor market slowdowns could translate into higher unemployment, as firms need to adjust not only job vacancies, but current jobs as well.”
The unemployment rate has risen slightly this year, and officials are watching carefully for a sharper move. Research shows that a sudden and sharp increase in unemployment is a signal of recession – a rule of thumb established by economist Claudia Sahm and often referred to as the “Sahm Rule”.