After a drop in job vacancies, a dip in rental costs and signs of growing consumer caution seemed to show the Federal Reserve’s strict monetary medicine beginning to kick in, a strong September jobs report has left policymakers waiting for clearer signs their efforts to cool the economy are working.
The Labor Department’s report, which showed a gain of more than a quarter of a million jobs, a drop in the unemployment rate, and continued healthy wage growth, points to a job market U.S. central bank officials will likely continue to see as out of line with declining inflation.
Job creation is slowing – a bit – and wage growth is ebbing – a touch.
But in comments on Thursday in advance of the jobs report, Fed Governor Christopher Waller said an expected payrolls gain of around 260,000, well above the pre-pandemic norm, would not “alter my view that we should be focused 100% on reducing inflation.”
Nonfarm payrolls grew by 263,000 last month.
Traders in contracts tied to the Fed’s policy rate boosted bets the central bank will hike its benchmark overnight interest rate by three-quarters of a percentage point for the fourth consecutive time at its Nov. 1-2 meeting.
“They’re going 75 (basis points) because that unemployment rate is going to bother them. The job growth is slowing, but that doesn’t matter. In their mind, we’re still at full employment if not through it,” said Joseph Lavorgna, chief U.S. economist at SMBC Nikko Securities in New York.
In projections issued at the end of the Sept. 20-21 policy meeting, Fed officials at the median expected the unemployment rate to rise to 3.8% by the end of the year and to 4.4% by the end of 2023 as the “pain” of a slowing economy took hold. The median Fed policymaker projection considers a 4% unemployment rate roughly consistent with stable inflation.
The unemployment rate in September, however, dropped to 3.5% from 3.7% in August, partly due to a decline in the number of people looking for work. That dealt a separate blow to the Fed and its hopes that the supply of willing workers would improve and help reduce the pressure on businesses to raise wages.
Though month-to-month changes in the employment report are often within the statistical margin of error for the survey used to prepare it, Vanguard economists said the labor force data in September indicated that a large August jump in the size of the workforce was an apparent “head fake.”
Average hourly earnings grew at a 5% pace on an annualized basis last month, slower than the pandemic peak but still higher than Fed officials have said they feel is in line with their 2% inflation target.
Like Waller, other U.S. central bank officials have remained adamant inflation is the singular focus. Even as they cite what Atlanta Fed President Raphael Bostic this week called “glimmers of hope” inflation will improve, they say rate hikes need to continue even at the risk of rising unemployment and financial stress.
Those “glimmers” include a recent decline through August and September in rents, a major component of the consumer price index (CPI), as well as evidence consumers may be pulling back. Consumer spending in August barely grew after adjusting for inflation, and recent census surveys have shown 40% of people struggling to pay bills – and perhaps ready to tighten their wallets.
Job vacancies in August dropped by 1.1 million, the largest decline outside the onset of the coronavirus pandemic and a trend, if continued, that would fit a central piece of the Fed’s narrative for how inflation could be brought down without workers paying too steep a price.
The hope is that companies trim their employment plans without resorting to layoffs.
The Fed had not raised rates by 75-basis-point increments since the early 1990s, but pivoted that way after the preferred measure of inflation spiked in the spring to more than triple the central bank’s target. The credit tightening underway now is the fastest since the 1970s and early 1980s.
The repercussions have been global – a soaring dollar, rising concern of a worldwide recession, signs of stress in some financial markets, and calls for the Fed to at least slow the pace of upcoming increases in borrowing costs.
The rhetoric of Fed officials has remained strict so far, with promises to “keep at it” until inflation is falling and little indication that concerns about global financial conditions were causing them to rethink the game plan.
In remarks on Thursday, Fed Governor Lisa Cook said that despite things like falling rents and job vacancies she still needed to see “inflation actually falling,” while Minneapolis Fed President Neel Kashkari said the bar to any policy change is “very high” at this point.
In a recent look at the globally important market for U.S. Treasury securities, Piper Sandler analysts Roberto Perli and Benson Durham said that even if there were signs of “illiquidity,” trading would have to become “dysfunctional” for the Fed to react.
“Illiquidity will not sway the Fed; dysfunctionality could,” they wrote. “However, the market is not dysfunctional; Yields still move in the direction they should given the macro outlook,” particularly the uncertainty about inflation.
Policymakers will get another key statistic to digest next week when the Labor Department releases its CPI report for September.
Economists polled by Reuters expect core consumer inflation, stripped of the most volatile food and energy components, actually rose last month, with prices forecast to increase at a 6.5% annual rate versus 6.3% in August.
Harvard University economics professor Karen Dynan, in a forecast prepared for the Peterson Institute for International Economics, said that to control inflation the Fed would need to raise the benchmark overnight interest rate perhaps a percentage point higher than policymakers themselves expect, into the mid-5% range, likely triggering a mild recession with a half-percentage-point contraction in gross domestic product in 2023.