Slowing US job growth offers some relief for the Fed

Slowing monthly U.S. job growth and a rising labor force have brought some relief to the Federal Reserve as it searches for signs of a slowing economy, but economists warn that A third consecutive interest rate increase of 0.75 percentage points later this month cannot be ruled out.

The world’s largest economy added 315,000 jobs in August, in line with economists’ expectations. This compares to the downgraded 526,000 jobs created in July, which had helped anchor the unemployment rate to its lowest level in several decades. The number of jobs added in June was also revised down to 293,000 from nearly 400,000.

Despite August’s gains, the unemployment rate edged up 0.2 percentage points to 3.7%. While the size of the labor force increased by 786,000, the number of people looking for work but still unemployed increased by 344,000. The labor force participation rate, which tracks the share of Americans employed or looking for work, rose accordingly to 62.4%, but still remains below its pre-coronavirus pandemic level.

The data, released Friday by the Bureau of Labor Statistics, underscores that the labor market remains robust, even as the fed started the most hawkish monetary tightening since the early 1980s.

“I think the Fed will appreciate the fact that the participation rate has increased, but the biggest problem for them remains that 300,000 jobs per month is still much too fast,” said Ajay Rajadhyaksha, global chair of research at Barclays.

Faced with the highest levels of inflation in four decades, the central bank is wondering how far to raise interest rates and for how long to keep them at a level that actively restricts economic activity.

In four months, the target range for the federal funds rate has moved from near zero to between 2.25% and 2.50%, and many officials believe that rates must approach or exceed 4% at some point to succeed in controlling inflation.

Now the Fed is faced with the question of whether to stretch one’s string 0.75 percentage point increases the rate for another meeting later this month or move to a slower pace and implement a half-point adjustment at its September meeting.

“Obviously they have a lot of work ahead of them,” said Robert Dent, senior US economist at Nomura. “[But] I think they know they can’t keep going up 75 basis points indefinitely.

All eyes are on the next inflation report due out later this month, but after the Fed entered its planned ‘blackout’ period, where it is limited in its public commentary .

Dent said the report is “ultimately the most important input for the Fed at this point for its near-term discussions.”

Most economists think a September rate hike of 0.75 percentage points is firmly on the table, especially in light of the extremely hawkish message from Chairman Jay Powell last month that the central bank “persevere” until it has restored price stability.

Powell also admitted that the process would likely involve a prolonged period of weaker growth, higher unemployment and “some pain” for households and businesses.

For Veronica Clark, an economist at Citigroup, said a third straight increase of 0.75 percentage points later this month would help ratify Powell’s message and underscore the Fed’s commitment to eradicating pressures on the costs.

“There’s no obvious sign, certainly not in the inflation data or the labor market data, to tell you that we’re going to operate at an ever-slower pace of underlying inflation,” she said. “In that sense, you just have to be more aggressive and if you have the chance to make a [0.75 percentage point move]why not take it?

Economists expect the monthly job growth rate to slow, especially as most of the losses caused by the pandemic have been recovered. But employers are still grappling with widespread labor shortages, which means they must compete fiercely to retain workers and hire new ones.

Data released earlier this week indicates that there are still around two vacancies per unemployed worker, indicating little easing of the extremely tight situation labor market.

As such, wages across the country have risen sharply, raising concerns about a feedback loop in which companies are forced to charge more for their products and services to cover these expenses, leading workers to demand even higher wages.

Average hourly earnings rose again in August, with wages rising 0.3% for the month, or 5.2% on an annual basis.

Employment in professional and business services increased by 68,000 and employment in health care increased by 48,000. Jobs in retail trade and manufacturing also increased, while those in leisure and hospitality sectors have changed little. The same was true for the construction and transport sectors.

In financial markets, the yield on the two-year US Treasury note, which is sensitive to interest rate expectations, fell 0.11 percentage points to 3.41%, after trading at around 3.48% just before the release of employment data. The S&P 500 gave up early session gains to be roughly flat during midday trading in New York.

Additional reporting by Kate Duguid in New York

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