Jobs Report to Keep Fed on Aggressive Tightening Path

Jobs Report to Keep Fed on Aggressive Tightening Path #Jobs #Report #Fed #Aggressive #Tightening #Path Welcome to Lopoid

The July jobs report defied expectations of an economic slowdown and will make it harder for the Federal Reserve to dial back the pace of rate increases at its meeting next month.

The Fed is trying to slow economic activity and hiring to bring down inflation that is running at 40-year highs. Friday’s job report shows the economy is still firing on many cylinders, making it more likely central bank officials conclude they need to raise rates to higher levels and to keep rates at those levels for longer to cool the economy.

The Fed raised rates by 0.75 percentage point at its meeting last week, following a similar increase in June, which was the largest since 1994. “Another unusually large increase could be appropriate at our next meeting,” but the decision “will depend on the data we get between now and then,” Fed Chairman

Jerome Powell

said at a July 27 news conference.

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Some Fed officials have suggested the central bank might raise rates by a half percentage point in September, and financial market participants have run with the idea that the central bank would soon slow its rate rises. But that depends crucially on a slowdown in economic activity, especially hiring, and Friday’s report offered no such signal.

Since last week’s Fed meeting, labor market data suggests wages have been even stronger than earlier reported, while hiring has been brisk. Employers added 528,000 jobs in July, recouping all of the jobs lost since February 2020, and the unemployment rate fell to 3.5% from 3.6% during the previous four months, the Labor Department said Friday.

Meanwhile, wage growth was stronger than economists anticipated in July, with average hourly earnings rising 0.5% from June and 5.2% from a year ago. Wage growth in June was also revised higher, indicating that earlier data overstated the magnitude of a recent deceleration in the brisk pace of wage growth.

A separate Labor Department report on employee compensation released July 29 that is widely watched inside the Fed also poured cold water on the idea that wage growth was slowing.

The behavior of wages is particularly important to the Fed right now because of concerns that companies are raising wages because they can pass higher labor costs onto consumers as a result of the current inflationary environment. Together, the two labor reports could fuel worries of such a wage-price spiral.

Fed officials have pushed back this week against investors’ expectations for a sooner end to rate rises. Chicago Fed President

Charles Evans

told reporters this week that if the economy slowed as he was anticipating, he would support raising rates by a half-percentage point at the central bank’s meeting in September. But he said a third consecutive 0.75-point rate rise wasn’t off the table if economic data was hotter than anticipated.

“The kinds of things that would make larger rate increases more important, like in September, would be if you really thought things weren’t improving,” Mr. Evans said Tuesday. “I think that there’s enough time to play out that 50 is a reasonable assessment, but 75 could also be OK.”

At a news conference last week, Mr. Powell said there was some evidence that the U.S. economy was slowing down as needed to bring inflation down from four-decade highs, which fueled a rally in markets as investors began to speculate that the Fed might end rate rises sooner.

Federal Reserve Chairman Jerome Powell said the central bank raised interest rates by three-quarters of a percentage point and signaled that more large increases to combat high inflation could be coming. Photo: Manuel Balce Ceneta/AP

“There’s a feeling that the labor market is moving back into balance….But it’s only the beginning of an adjustment,” Mr. Powell said last week.

Mr. Powell said that to slow and then stop their rate increases, officials needed to be confident that inflation was going to return to its 2% target. “That’s not something we can avoid doing. That really needs to happen,” he said.

Mr. Powell also said the outlook remained unusually uncertain, which could make it difficult to anticipate the central bank’s coming decisions. “We think that demand is moderating. We do. How much is it moderating? We’re not sure,” he said.

Consumers still have significant unspent savings from the pandemic, and the labor market “is very hot,” Mr. Powell added. “So it’s the kind of thing where you think that the economy should actually be doing pretty well in the second half of the year, but we’ll have to see. We don’t know that.”

Write to Nick Timiraos at nick.timiraos@wsj.com

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