US job growth slows as Fed tightening takes effect

US job growth slowed for a fifth consecutive month in December after the Federal Reserve’s aggressive interest rate hikes depressed economic activity even as the US labor market remained historically tight.

The world’s largest economy added 223,000 jobs in the final month of 2022, lower than the downwardly revised increase of 256,000 recorded in November and well below last year’s peak of 714,000 in February. Most economists had expected an increase of 200,000.

After the increase in December, monthly job growth averaged 375,000 in 2022. The number of jobs added has fallen each month since August.

Despite the slowing pace of job growth, the labor market is still showing a resilience that is likely to give the Fed the confidence it needs to move forward with plans to raise interest rates further.

The unemployment rate unexpectedly fell to 3.5 percent, returning to a historic low, data released by the Bureau of Labor Statistics showed.

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The US Federal Reserve is actively trying to cool the labor market and curb demand for new hires as it tries to curb price pressures that have pushed inflation to multi-decade highs. Since March, the Fed has raised the benchmark interest rate from near zero to just below 4.5 percent in one of the most aggressive campaigns in its history.

While the worst of the inflationary shock appears to have passed, price pressures have gripped the service sector of the economy. In an interview with the Financial Times this week, Gita Gopinath, the first deputy managing director of the IMF, urged the Fed to “stay the course” on tightening, arguing that inflation in the US has not “turned the corner yet”.

Amid a labor shortage that Fed officials warn will not be easily reversed, wage growth is moving at a pace that is far out of step with the Fed’s 2 percent inflation target.

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In December, average hourly earnings rose a further 0.3 per cent, less than expected and slower than the previous period. On an annual basis, it is up 4.6 percent. The labor force participation rate, which tracks the share of Americans either employed or looking for a job, was little changed at 62.3 percent.

Fed policymakers have recognized that stopping inflation will require job losses and, in turn, higher unemployment. According to the latest individual projections published by the Fed, most officials see the unemployment rate rising as high as 4.6 percent this year and next as the benchmark interest rate exceeds 5 percent and is held there for an extended period.

“Holder [above 5 per cent] until we get evidence that inflation is actually coming down is really the message we’re trying to put out there, Esther George, the outgoing president of the Kansas City Fed, said Thursday.

On a similar note this week, Neel Kashkari of the Minneapolis Fed said he expects the central bank to raise the federal funds rate by another percentage point in the coming months. He will be a voting member of the policy-making Federal Open Market Committee this year.

Should the Fed follow this aggressive path, economists warn that more material job losses could be on the horizon. They asked last month in a joint survey by the FT and the Initiative on Global Markets at the University of Chicago Booth School of Business that unemployment will reach at least 5.5 percent next year as the economy tips into recession.

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