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A strong labor market does not cooperate with the Fed

Illustration of suitcase full of 100 and 20 dollar bills

Illustration: Eniola Odetunde/Axios

There is no doubt about it: the labor market is fantastic for workers. That continues to benefit American workers, but it makes the Federal Reserve’s campaign to bring down inflation that much more difficult.

Why it matters: The longer the labor market fails to cooperate with the Fed’s engineered slowdown, the higher it will eventually need to push interest rates — and the more likely it is that the central bank will overdo things and cause an abrupt downturn.

Where it stands: There are plenty of jobs, and companies have a robust appetite for new employees who are in short supply. The result is higher wages, which have actually risen faster than consumer prices in recent months.

  • In the Fed’s ideal scenario, more workers re-enter the labor force and the demand for employees decreases, helping to heal the labor supply-demand mismatch. Wage growth will slow, and prices will fall more.
  • But the opposite happens. The labor force shrank in November for the third month in a row; employers continue to increase their payrolls en masse; and wage growth accelerated.

With the numbers: Employers added 263,000 jobs last month, well above the minimum requirement of about 100,000 jobs to keep pace with population growth.

  • Missing from the aggregate data was evidence of a serious decline in hiring in sectors such as technology that grab all the headlines. In fact, the information sector has added an average of 14,000 jobs each month this year — on par with the 16,000 added in 2021.
  • All employees who are laid off quickly find new jobs. The median duration of unemployment is 8.4 weeks, shorter than the 9.7 weeks before the pandemic.

Perhaps the most surprising news on the November jobs report: Average hourly wages for private sector workers rose 0.6%, and wage growth for September and October was revised upward.

  • During this three-month period, average hourly earnings rose at an annual rate of 5.8% – well above what the Fed would consider consistent with price stability.

What’s next: The Fed’s next policy action is pretty clear. It will probably raise the target interest rate by 0.5 percentage points at a meeting that ends on 14 December.

  • But the hot labor market makes it more likely that official estimates of how high they will eventually push interest rates will be markedly higher, probably above 5% (in September they envisioned a peak of around 4.6%).

What they say: Joe Brusuelas, chief economist at RSM, believes the data will prompt the Fed to “raise the policy rate above 5% – perhaps as high as 5.5% – before they get any idea of ​​a strategic pause in efforts to restore price stability.”

  • “This suggests that the likelihood of the central bank creating economic conditions for a soft landing has diminished and supports our call for a mild recession next year,” he adds.

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