Today’s world of soaring prices is complicated for policymakers, who worry that an overheated labor market could exacerbate stubborn inflation. Rather than seeing the growing demand for labor as an undiminished commodity, they hope to create a gradual and controlled slowdown in hiring and wage growth, which remain unusually strong. Friday’s report gave early signs that the desired cooling is taking hold as both job gains and wage increases moderated slightly. But hiring and wages remained steady enough to reinforce Fed officials’ view that the labor market, like much of the economy, is out of whack: Employers still want far more workers than are available. The new data will likely keep central bankers on track for another outsized rate hike at their meeting later this month as they try to rein in consumer and business spending and force the economy back into balance. “We’re starting to see those first signs of a slowdown, which is what we need,” Rafael Bostick, president of the Federal Reserve Bank of Atlanta, said in an interview with CNBC after the report was released. However, he called the wage figures “only slightly” reassuring and said “we are starting to move in the right direction, but there is still a lot to do and a lot more to be seen.” Fed officials began raising interest rates from near zero in March in an effort to make borrowing of many kinds more expensive. Last month, the central bank raised its policy rate by 0.75 percentage points, the biggest single increase since 1994. Central bankers typically only adjust policy in quarterly increments, but they are accelerating the pace as inflation proves alarmingly fast and stubborn. While Fed policymakers said they would discuss a move between 0.5 and 0.75 percentage points at their meeting on July 26 and 27, a chorus of officials said in recent days they would support a second move of 0.75 percentage points given the speed of inflation and the strength of the labor market. As the Fed tries to put the brakes on the economy, Wall Street economists have warned it could instead tip it into recession — and the Biden administration is pushing back against claims it has already arrived. Falling overall growth data, a retreat in the housing market and a slowdown in factory orders have fueled concern that America is on the brink of recession. The employment data starkly contradicts this narrative, because a shrinking economy typically doesn’t add jobs, let alone at the current rapid pace. Mr. Biden celebrated the report on Friday, saying that “our critics said the economy was too weak” but that “we still added more jobs in the last three months than any administration in almost 40 years.” Private sector voices agreed that the jobs report showed an economy that did not appear to be falling. “Wage growth remains elevated and job loss rates are low,” Nick Bunker, director of economic research at job site Indeed, wrote in a reaction note. “We will see another recession someday, but today is not that day.”
The state of jobs in the United States
Job gains continue to maintain their impressive pace, easing concerns about an economic slowdown but complicating efforts to fight inflation.
The contradictory moment in the economy – with prices rising rapidly, economic growth shrinking and the unemployment rate hovering near a 50-year low – has posed a challenge for Mr Biden, who has struggled to appeal to consumers struggling with higher prices while seeking credit for the strength of the jobs recovery. Mr. Biden’s approval ratings have slipped as price increases have accelerated. Confidence has taken a particularly hard hit in recent months amid rising gas prices, which averaged more than $5 a gallon earlier this summer. On Friday, Mr. Biden emphasized that fighting inflation was his top economic priority, while also praising recent progress in the labor market. “I know times are tough,” Mr. Biden said, speaking in public comments. “The prices are too high. Families face a cost of living problem. But today’s economic news confirms the fact that my economic plan is moving this country in a better direction.” But unfortunately for management and workers across America, dealing with high prices will likely come at some cost in the labor market. As prices increase for consumers at the gas pump and the grocery store, the Fed believes it needs to get inflation under control quickly in order to put the economy on a path to healthy and sustainable growth. The Fed’s tool for achieving this positive long-term effect works by causing short-term financial pain. By making it expensive to borrow money, the central bank can slow home buying and business expansion, which in turn will slow hiring and wage increases. As companies and families have fewer dollars to spend, the theory goes, demand will better align with supply and prices will stop shooting higher. Officials expect unemployment to eventually accelerate as interest rate hikes bite and the economy weakens, though they hope it will rise slightly. Fed policymakers still hope to engineer what they often call a “soft landing,” where hiring and wage gains slow gradually but without plunging the economy into a painful recession. But pulling it back won’t be easy – and officials are willing to cut back more if that’s what it takes to moderate inflation. “Price stability is absolutely necessary for the economy to achieve its potential and maintain maximum employment over the medium term,” John C. Williams, president of the Federal Reserve Bank of New York, said in a speech in Puerto Rico on Friday . “I want to be clear: It is not an easy task. We must be decisive and we cannot lag behind.” Stocks fell after the jobs numbers were released, likely because investors saw them as a sign that the Fed would continue to tighten the economy. “The tremendous momentum in the economy to me suggests that we can move to 75 basis points in the next session and not see much sustained damage to the broader economy,” Mr Bostic said on Friday. In particular, Fed officials are keeping a close eye on wage data. Average hourly earnings rose 5.1 percent in the year to June, down slightly from 5.3 percent the previous month. Non-executive pay increased rapidly by 6.4 percent compared to the previous year. While that rate of growth is slowing somewhat, it’s still much higher than normal – and could keep inflation high if it continues as employers charge more to cover rising labor costs. “Wages are not primarily responsible for the inflation we’re seeing, but going forward, they would be very important, particularly in the services sector,” Fed Chairman Jerome H. Powell said at a press conference in June. “If you don’t have price stability, the economy isn’t really going to work the way it’s supposed to,” he added later. “It won’t work for people – their wages will be eaten.” Inflation has been above the Fed’s target for more than a year. The Personal Consumption Expenditure measure excluding food and energy prices, which the Fed tracks for a sense of underlying inflation trends, rose 4.7% in the year to May. And that’s the least dramatic of the big inflation measures. Prices rose 8.6 percent in the year to May, as measured by the Consumer Price Index, and the June figure, due next week, may show a further recovery. Central bankers are increasingly worried that high costs are going to feed into consumers’ inflation expectations, making price gains harder to wipe out. Once workers and businesses begin to believe that prices will rise rapidly year after year, they may change behavior, seeking larger wage increases and more regular price adjustments. This could make inflation a more permanent feature of the US economy. The Fed wants to prevent that outcome. If it raises rates by 0.75 percentage points this month, it will bring rates to a range of 2.25 to 2.5 percent, and officials have signaled they will likely raise borrowing costs by another percentage point by end of the year. “Supply and demand will return to balance and inflation will return to our long-term target of 2 per cent,” Mr Williams said. “This may take some time and may be a bumpy road.”
