Strong wage and job growth keep the Fed on track for a big rate hike

Wages rose sharply in June and employers continued their hiring spree, the latest evidence that the job market remains strong even as the Federal Reserve tries to cool the economy and contain inflation. The data is likely to keep central bankers on track for a large rate move at their July meeting.

Employers added 372,000 workers last month, fewer than in May but more than economists expected, data released Friday showed. At the same time, average hourly earnings rose 5.1 percent in the year to June, down slightly from 5.3 percent in the year to May. Economists in a Bloomberg survey had expected a further cooling, to 5 percent.

Fed officials spent the years leading up to the pandemic cheering every solid wage figure, but recent wage gains, while not enough to keep up with inflation, have been fast enough to make it hard for rapid inflation to slow. to 2 percent per annum from the central bank. goal. This is because, as companies pay more, they typically try to cover their costs by raising prices.

The new wage and employment data will likely reinforce the Fed’s view that the economy remains strong and inflation pressures persist, keeping it on track for a big rate hike of 0.75 percentage point, also called 75 basis points. in July. Central bankers are raising rates rapidly as they try to bring price increases back under control.

“To me, the tremendous momentum in the economy suggests that we can move to 75 basis points at the next meeting and not see a lot of prolonged damage to the broader economy,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in a statement. a CNBC interview after the report.

Fed officials raised their policy rate for the first time by 0.75 percentage point in June, in their biggest single increase since 1994, as new data showed inflation turning out to be surprisingly fast and stubborn. A chorus of officials has said in recent days that they would support a similarly sized second movement. Policymakers typically adjust their policy only in quarter-point increments.

Officials still want to engineer what they often call a “soft landing,” in which hiring and pay gains gradually slow and help both consumer demand and rapid price increases moderate, but without sinking the economy into a painful recession. But they have also made it clear that they will inflict economic damage if inflation needs to be brought down.

“Price stability is absolutely essential for the economy to reach its potential and maintain maximum employment in the medium term,” said John C. Williams, president of the Federal Reserve Bank of New York, in a speech in Puerto Rico on Friday. “I want to be clear: this is not an easy task. We must be determined, and we cannot fall short.”

Bostic seemed to take Friday’s report as a sign that the Fed’s approach is working as planned so far, noting that hiring has slowed somewhat at a time when the Fed wants to see moderation in the economy.

“We’re starting to see the first signs of a slowdown, which is what we need,” Bostic said. “Some of today’s numbers suggest that’s happening, and that’s a positive sign.”

However, Wall Street remains concerned that the Federal Reserve will push the United States into a recession in its quest to reduce inflation. Stocks fell after the release of the jobs numbers, likely because investors took them as a sign that the Fed would continue its aggressive campaign to tighten the economy as hiring and wage growth remain strong.

Non-manager wages, which are closely watched by economists as an indicator of underlying strength in the labor market, rose a brisk 6.4 percent from a year earlier, the new report showed. That pace is slowing a bit, but it’s still much higher than normal and could keep inflation elevated if it persists.

“Wages are not the main driver of the inflation we are seeing, but going forward they will be very important, particularly in the service sector,” Fed Chairman Jerome H. Powell said at his June news conference.

“If there is no price stability, the economy is not really going to work like it’s supposed to,” he added later. “It won’t work for people, their wages will be consumed.”

Goldman Sachs economists have estimated that using its pay growth tracker, which has been running a few tenths of a percentage point higher than the general estimate of average hourly earnings, at 5.4 percent in the most recent reading, earnings Wage rates probably need to be lowered to around 3.5. percent to be consistent with the Fed’s inflation target.

While the Fed is targeting price increases of 2 percent on average, inflation has been well above that for more than a year. The measure of the Personal Consumption Expenditures index excluding food and energy prices, which the Fed monitors to get a sense of underlying trends in inflation, rose 4.7 percent in the year to May.

And that is the least dramatic of the main measures of inflation. Prices rose 8.6 percent in the year to May, as measured by the Consumer Price Index, fueled by big spikes in grocery and gasoline costs, and the June number, due out next week. , may show a greater rebound.

Central bankers are increasingly concerned that those high inflation readings will trickle down into consumer inflation expectations, making price gains even harder to wipe out. Once workers and businesses begin to believe that prices will rise rapidly year after year, they may change their behavior, asking for higher wage increases and instituting more regular cost increases, so that inflation becomes a more permanent feature of the economy. the American economy.

Many officials at the June meeting of the Fed’s policy-setting committee “believed that a significant risk now facing the committee is that elevated inflation could take hold if the public begins to question the committee’s determination to adjust the Fed’s stance.” policy as warranted,” according to the minutes released Wednesday.

If the Fed raises rates by 0.75 percentage point this month, it would push interest rates into a range of 2.25 to 2.5 percent. Central bankers have signaled that they will likely raise borrowing costs by another percentage point by the end of the year.

Those rate hikes are already weighing on the housing market as they make mortgages considerably more expensive, and there are early signs they’re beginning to trickle down through the broader economy as construction moderates and new orders factory set back.

While weakening economic data has fueled speculation that the economy could be headed for a recession, and recession fears have gripped Wall Street in recent weeks, there are also signs of continued economic strength. Friday’s report only served to reinforce them.

“Wage growth remains high and job loss rates low,” Nick Bunker, director of economic research at employment website Indeed, wrote in a note reacting to the report. “We will see another recession one day, but today is not that day.”

But Williams of the New York Fed suggested that even significant signs of an economic slowdown might not be enough to deter the Fed.

“Supply and demand will come back into balance, and inflation will return to our long-term target of 2 percent,” Williams said. “This may take some time and may well be a bumpy road.”

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