Fed returns to focus on labor market, with less financial risks and high inflation

Federal Reserve officials who are hoping slower US job growth will help them in their fight to curb high inflation will get essential data on jobs and wages on Friday, in the last batch of data before their next decision on interest rates at the beginning of May.

Economists anticipate what, from the Fed’s perspective, will be a lackluster result for March, a month rocked by the biggest bank failures since the 2007-2009 financial crisis, events that, at least for a brief period, shifted attention main of the monetary leaders of the inflation to the financial stability.

Now that the worst consequences for the financial sector appear to have been averted, at least for the time being, the attention turns back to the real economyincluding employment and wage growth, which are likely to remain above what is considered consistent with the inflation target of 2% of the Federal Reserve.

Details such as tepid expected manufacturing job growth and fewer sectors adding jobs may point to a heightened sense among businesses that the economy is slowing and consumer demand is picking up. weakening, which could help reduce the pace of price increases.

However, the headline numbers may be less reassuring for the US central bank.

Economists polled by Reuters anticipate an increase of 239,000 jobs in March, with hourly wages rising 4.3% annually and the unemployment rate at 3.6%, a level that has been recorded less than 20% of the time in These data have been collected since World War II. The Labor Department will release the report at 8:30 am EDT (1230 GMT).

By comparison, payroll growth in the decade before the COVID-19 pandemic averaged 180,000 a month, and wage increases hovered near the 2%-3% range that those responsible for The Federal Reserve’s monetary policy is considered consistent with its goal of a 2% annual increase in the price index for personal consumption expenditures.

The PCE price index rose 5% annually in February, or 4.6% excluding volatile food and energy prices, which is too high for the Fed’s liking and shows only a slow improvement in last months.

Gregory Daco, chief economist at EY Parthenon, estimates that job growth may have slowed to 150,000 positions in March, but other data, including a still high level of job openings, indicates that “labor market rigidity will continue to be a feature of this business cycle“, said. This should keep the Federal Reserve on track to raise its benchmark overnight rate another quarter of a percentage point at its May 2-3 meeting.

TOa hot?

The question now is how long this economic cycle can last and whether the seeds of a major slowdown are taking root.

The median unemployment rate projected for the end of 2023 by Federal Reserve officials at their March meeting was 4.5%, implying a comparatively steep rise in unemployment that would in the past indicate a recession was underway.

The Fed’s monetary officials would never say that their goal is to cause a recession. However, they have also been adamant that, in the current situation, there are too many jobs chasing too few workers, a recipe for wage and price increases to start reinforcing each other the longer the situation persists.

“Labor markets are still pretty, I would say, hot. Unemployment remains at a very low levelsaid Boston Fed President Susan Collins in an interview with Reuters last week. “Until labor markets cool down, at least to some degree, we’re not likely to see the slowdown we probably need.” to reduce inflation to the target of the Federal Reserve.

Change, however, may be coming.

Economist Daco pointed to the 0.3% decline in the average number of weekly hours worked in February, a statistic he said should be watched for evidence of “a more worrying slowdown in the labor market”.

Payroll provider UKG said shift work among its sample of 35,000 companies fell 1.6% in March, an unseasonally adjusted figure that Dave Gilbertson, the company’s vice president, indicated indicated positive overall job growth, but did not “as overheated as it’s been.”

The job gains in January and February were larger than expected and produced a brief moment when Federal Reserve officials thought they might have to raise rates further again, an impression that faded after the recent bank failures.

The Conference Board economists, for their part, noted that a new index incorporating economic, monetary policy and demographic data showed that 11 of the top 18 industries are at modest to high risk of layoffs this year.

The Conference Board economists have been bearish in saying that a recession is likely to start between now and the end of June, although “it could still be some time before widespread job losses occursaid Frank Steemers, the think tank’s chief economist.

View put into services

Some of that may be getting underway.

The Labor Department on Thursday released revisions to its measurement of unemployment benefit rolls, showing that more than 100,000 more people than previously estimated have recently been receiving unemployment aid. In addition, the outplacement company Challenger, Gray & Christmas He said the roughly 270,000 layoffs announced this year through March were the highest quarterly total since 2009, outside of the pandemic.

For the Federal Reserve, however, this is only part of the puzzle. The relationship between “slack” in the labor market and lower inflation may depend on at what point job growth slows and over what period.

A new study of the Federal Reserve The Kansas City survey suggests that the process may prove more difficult than expected, as the service-sector industries that currently drive wage growth and inflation are the least sensitive to changes in monetary policy.

If sectors like manufacturing and homebuilding follow the usual patterns when the Federal Reserve interest rates rise, credit becomes more expensive and demand and employment slow down. However, the service industries that are responsible for the bulk of US economic output are more labor-intensive and less sensitive to rate hikes, the economists said. Kansas City Fed Karlye Dilts Stedman and Emily Pollard.

“The services sector, in particular, has contributed substantially to recent inflation, reflecting current imbalances in labor markets, where supply remains weak and demand remains robust.they said.

“Because service production tends to be less capital-intensive and service consumption less likely to be financed, it also tends to respond less quickly to rising interest rates. Thus, monetary policy may take longer to influence a key source of current inflation.