As US Job Market Cools, Fed’s Role Becomes Simpler – Reuters

By Ann Saphir and Howard Schneider

Slower job growth and easing wage pressures may provide Federal Reserve policymakers with renewed confidence that the U.S. economy is adjusting after the shocks of the coronavirus pandemic. This development could allow inflation to decline further without necessitating additional interest rate hikes.

Analysts interpreted the recent Labor Department report, which indicated a nonfarm payroll increase of 150,000 jobs last month. This figure falls below pre-pandemic trends for only the third time since December 2020. Additionally, hourly earnings rose by 4.1% compared to the previous year, marking the smallest increase since June 2021.

Financial markets echoed this analysis, with bond yields dropping. Traders now estimate just a 10% likelihood of a rate hike by January, a decrease from 30% prior to the employment report. Rate futures now reflect a greater than even chance of a Fed rate cut by May 2024, with additional cuts expected later in the year.

However, U.S. policymakers, including Fed Chair Jerome Powell, are not currently contemplating rate cuts. Following the decision to maintain the benchmark overnight interest rate in the 5.25%-5.50% range, Powell noted the need for more confirmation that the economy is stabilizing after pandemic-induced supply chain disruptions contributed to record-high inflation in 2022.

Powell did indicate that another rate hike could still be a possibility, as there is no confidence yet that monetary policy is sufficiently restrictive to bring inflation down to the Fed’s 2% target. He referred to the rise in longer-term borrowing costs, particularly the nearly 8% rate for 30-year fixed mortgages, as a factor that might help curb inflation.

The recent decline in the yield of the benchmark 10-year Treasury note to below 4.5% following the jobs report presents a challenge. If this trend continues, it could strengthen the case for further rate hikes to prevent excessive loosening of borrowing conditions. Nevertheless, neither analysts nor Fed officials are currently considering the drop in bond yields as a significant concern.

Minneapolis Fed President Neel Kashkari emphasized the importance of monitoring actual data to assess progress toward the 2% inflation target, noting that the latest information provides more assurance that the economy is returning to balance.

The coming weeks leading up to the Fed’s December policy meeting will be crucial, with investors and analysts generally expecting continued easing of price pressures. The average monthly payroll gain over the last three months has slowed to 204,000, approaching the pre-pandemic average of 183,000.

Richmond Fed President Thomas Barkin expressed satisfaction with the jobs report and highlighted that businesses have been reporting a normalization in the workforce.

Inflation, measured by the Fed’s preferred index, has remained around 3.4% for the past few months, down from 7.1% last summer, but still higher than the 2% target.

Atlanta Fed President Raphael Bostic stated that he is closely observing inflation data but believes the new job figures support his view that rates are currently "sufficiently restrictive."

Fed officials are striving for a policy rate that effectively lowers inflation while avoiding excessive harm to the labor market. Powell’s recent comments suggest the Fed aims for a "soft landing" for the economy, a challenging goal historically.

Despite the drop in bond yields and the resultant rise in stock prices, which have softened financial conditions, many analysts, including JPMorgan’s chief U.S. economist Michael Feroli, argue that economic data will ultimately dictate the Fed’s course. While the current jobs report aligns with Powell’s message of a soft landing, there are indications of caution, such as a decrease in the job-finding rate for the unemployed and a consecutive rise in unemployment.

Nick Bunker from Indeed.com expressed concern about the rising unemployment, hoping that this trend stabilizes as the labor market continues to recover. Observations from Inflation Insights’ Omair Sharif suggest workers are finding it more challenging to secure employment compared to the period dubbed the "great resignation."

In sectors like hospitality, where demand had previously surged during the pandemic, employment has also diminished.

For now, many concerns surrounding the labor market seem to center on uncertainties about the future.

"We are transitioning to the next phase of recovery," remarked acting U.S. Labor Secretary Julie Su.