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Thursday, January 27, 2022

Jobs Report Likely Keeps Fed on Track for Rate Rise in March

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Another drop in the unemployment rate in December is likely to keep Fed officials on track to raise interest rates from near zero at the March policy meeting.

The Labor Department said Friday that employers added 199,000 jobs in December. Revisions in the past two months showed that 141,000 more jobs were created than previously estimated. The unemployment rate fell to 3.9%, continuing a historically rapid decline over the past six months, from 5.9% in June.

Evidence of tightening labor markets and rising inflation have provided new urgency for the Federal Reserve to start draining the stimulus tanks it has pumped into the economy after the pandemic struck nearly two years ago.

At their meeting last month, Federal Reserve officials approved plans to scale back or scale back the bond-buying program more quickly to end it by March rather than June. They want to stop providing the incentive for those purchases before raising short-term interest rates.

The minutes of the meeting, released on Wednesday, showed that most officials believe the economy will reach conditions corresponding to maximum employment soon, and some already believe the target was reached last month. Friday’s report is unlikely to change that calculation. Officials said they would raise prices once that condition was met.

The minutes also twice referred to labor markets as “extremely tight,” indicating greater conviction that the economy will need higher interest rates to slow growth and prevent overheating.

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“We are making rapid progress toward maximizing employment,” Federal Reserve Chairman Jerome Powell said at a press conference on December 15.

The proportion of people aged 25-54 who were employed in December rose to 79% and is up a full percentage point since August. That rate reached 80.5% in February 2020 before the coronavirus pandemic hit.

Although overall job growth was slower than economists expected in December, strong wage growth is likely to be more important for the Fed. Average hourly wages rose 0.6% last month, bringing annual wage growth to 4.7%.

“The modest growth in payrolls and significant wage growth is consistent with the narrative that jobs are hard to fill, and that the wage pressure we have seen in recent months is structural and unlikely to reverse any time soon,” said Thomas Simmons, an economist. In investment bank Jefferies. “This bodes well for continued inflation pressures as well.”

The Federal Reserve says it will speed up the process of ending its bond-buying program, the central bank’s biggest move to reverse stimulus in the era of the pandemic. Here’s how tapering off works and why it’s sending markets over the edge. Photo caption: Adele Morgan/WSJ

Federal Reserve officials’ decision to move away from gas more quickly reflects a shift in calculus about the potential for increased demand to raise prices — such as wages and rents — even after supply chain bottlenecks and shortages of items such as cars recede.

Rising demand for goods, supply chain disruptions and various shortages pushed 12-month inflation to its highest readings in decades. Core consumer prices, which exclude volatile food and energy categories, rose 4.7% in November from a year earlier, according to the Federal Reserve’s preferred metric. This is well above the Fed’s 2% target and officials’ stated desire to keep inflation a little higher than that target.

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But it’s developments in the labor market, not just higher inflation readings, that have provided fuel for the Fed’s pivot in recent weeks toward tightening policy much faster than seemed likely last summer. Friday’s report will be the last reading that labor market officials receive before the January 25-26 policy meeting, when officials are likely to continue discussions about the extent and speed of reducing their asset portfolio once interest rates are raised.

Federal Reserve officials still expect inflation to slow this year as supply chain bottlenecks ease, but they are more concerned about the inflation backdrop even after this has occurred due to rising wages and housing costs. They’re watching for evidence that the big jump in prices in 2021 isn’t driving consumers and businesses to expect higher inflation in the future, which could create the kind of wage and price vortex that has historically prompted the Federal Reserve to raise interest rates quickly. , the risk of a recession.

“There is a real danger now, I think, that inflation may be more persistent and … the risk of solidifying higher inflation has increased,” Powell said last month.

Mr. Powell’s confirmation hearing for another term as Fed chair is scheduled for Tuesday before the Senate Banking Committee, giving Mr. Powell one last chance to clarify his thinking on preparations for tightening federal policy before the officials meet later this month. Mr. Powell’s current term ends early next month.

write to Nick Timiraos and nick.timiraos@wsj.com

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