Fed Delicate Dance: In October, the U.S. jobs report provided some much-needed reassurance to Federal Reserve officials who are navigating the tricky terrain of balancing high inflation and robust job growth while avoiding a potential recession due to their own interest rate hikes and tighter credit conditions.
However, the headline job gain of 150,000 needs a footnote: it was impacted by a United Auto Workers strike. Yet, even when accounting for this disruption, the figure closely aligns with the 183,000 monthly pace of job growth seen from 2010 to 2019, in the decade before the pandemic. This “normal” pace is a welcome sight after a period of exceptional job gains.
Additionally, revisions to the August and September job numbers were downward, subtracting 101,000 positions from the total. September’s initial blockbuster estimate of 336,000 jobs was adjusted down to 297,000, and August’s numbers were revised to 165,000, both falling below the pre-pandemic average. Wage gains, another key metric for the Fed, also decelerated, which many officials believe is necessary for inflation to return to its 2% target. The Fed typically feels comfortable with wage growth around 3%, but anything significantly higher can raise concerns.
In October, annual wage growth eased to 4.1%, continuing its decline. The month-to-month increase, at 0.2%, annualizes to approximately 2.4%, comfortably within the Fed’s comfort zone.
The unemployment rate provides further room for the Fed to view the economy as adjusting steadily to the pandemic’s shock, rather than stuck in a persistent inflationary scenario requiring more rate hikes, or teetering on the edge of recession, which would intensify pressure on the central bank.
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The inflation outlook remains uncertain, and some economists maintain that a more substantial rise in unemployment is necessary to fully quell price pressures. They argue that economic “slack,” characterized by reduced demand for goods and services and available workers to produce them, is still required.
Nonetheless, so far, progress on inflation has come with surprisingly little employment pain. This is consistent with improved supply chain conditions and overall supply-side improvements that enable the economy to produce more without pushing prices higher.
Fed Chair Jerome Powell highlighted the recent growth in the labor force – people either working or seeking work – as a sign of the economy moving toward a healthier balance. This increased labor force participation allows businesses to fill numerous vacant positions, alleviating the intense wage competition that had driven up wages and contributed to significant job changes during the pandemic.
Although the monthly labor force figures can be volatile, the decline of over 200,000 people in October, the largest since June 2022, suggests that the job market is approaching a more balanced state. However, if strong consumer demand continues to generate a high number of job openings, a halt in labor force growth could reignite wage pressures. The Fed’s delicate balancing act continues.