Federal Reserve policymakers are heavily focused on the strength of the labor market as they debate how much longer the economy needs to cool to ensure rapid inflation falls back to a normal pace. Fresh labor market data released on Friday likely offered little to dissuade them from raising interest rates at their meeting this month.
The June data is the last wage report that officials will receive before the central bank’s meeting on 25-26. July. It underscored many of the labor market themes that have been present for several months: Although job growth is gradually slowing, wage growth remains abnormally fast and the unemployment rate is very low at 3.6 percent.
Investors widely expected the Fed to raise interest rates at its July meeting even before the report, and the June data reinforced that prediction. Many paid particularly close attention to the wage data: Average hourly earnings rose 4.4 percent during the year through June, against an expectation of 4.2 percent, and wage growth for May was revised higher. After months of decline, these revenue numbers have remained roughly stable since March.
“On balance, it’s strong enough that the Fed thinks they still have some more work to do,” said Michael Gapen, chief U.S. economist at Bank of America, explaining that the report contained both signs of early weakness and signs of sustained strength. “Hiring is cooling, but the labor market is still hot.”
Fed officials are watching wage data closely because they worry that if wage growth remains unusually fast, it could make it difficult to bring elevated inflation all the way back to the 2 percent target. The logic? When companies compensate their workers better, they can also raise prices to cover higher labor costs. At the same time, families who earn more will be more able to bear higher prices.
Fed officials have been surprised by the economy’s resilience 16 months into their efforts to slow it by raising interest rates, which make it more expensive to borrow money and are meant to cool consumer and business demand. Growth is slower, but the housing market has begun to stabilize and the labor market has remained abnormally strong with ample opportunity and at least some bargaining power for many workers.
That resilience — along with the stubbornness of rapid inflation, especially for services — is why policymakers expect to keep raising interest rates, which they have already lifted above 5 percent for the first time in about 15 years. Officials have raised rates in smaller increments this year than last, and they skipped a rate change at the June meeting for the first time in 11 meetings. But several decision-makers have been clear that even if the pace is moderated, they still expect to raise interest rates further.
“It might make sense to skip a meeting and move more gradually,” Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, said during a speech this week, noting that it is important for officials to follow up by continuing to raise rates.
She added that “inflation and the labor market developing more or less as expected would not change the outlook.”
Fed officials predicted in June that they would raise interest rates twice more this year — assuming they move in quarter-point increments — and that the labor market would soften, but only slightly. They saw that unemployment rose to 4.1 percent at the end of the year.
Policymakers will not release new economic forecasts until September, but Wall Street will monitor how policymakers react to economic developments to gauge whether another move this year is likely.
“Job growth has slowed but remains too strong to justify an extended Fed pause,” said Seema Shah, global chief strategist at Principal Asset Management, explaining that the fresh data gave the Fed “little reason” to hold off on an increase in July. The question is what happens after that.
For now, investors see another rate hike after July as possible but not guaranteed, and the June jobs report did little to change that.
The yield on the two-year government bond, which is sensitive to changes in investors’ expectations of future interest rates, fell to around 4.9 per cent, from over 5 per cent. The move partly reflected investors’ relief that jobs numbers had not followed a number of other data points this week that beat expectations.
Some on Wall Street expect the economy to soften more in the coming months, which could prompt the Fed to hold off on future rate moves. It often takes months or years for higher borrowing costs to have their full economic effect, so more slowdowns may already be in the pipeline.
This month, one of Wall Street’s much-watched recession indicators, which compares yields on short-dated and long-dated Treasuries, sent its strongest signal since the early 1980s that a downturn is on the way.
But Fed officials aren’t so sure. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said Friday on CNBC that bringing down inflation without a recession would be a “triumph.”
“It’s the golden path — and I feel like we’re on the golden path,” Mr. Goolsbee said.