Weak jobs and rising prices raise the stakes for the Fed

Weak jobs and rising prices raise the stakes for the Fed

A weak employment report in September is unlikely to derail the Federal Reserve’s plans to slowly begin to withdraw some economic support later this year. But this is the latest indication of the delicate balancing act the central bank faces as it tries to control inflation while allowing the labor market to recover.

The Fed has two missions: to promote as many jobs as possible and to keep inflation low and stable. In recent decades, inflation has been contained, if not lukewarm, so that central bankers have been able to give the labor market a lot of leeway to recover. But today inflation has jumped and rising wages suggest employers may have to keep raising prices to cover costs. At the same time, millions of jobs are still missing from before the pandemic, and they are only reappearing.

These trends could prompt the Fed to pass a harsh judgment on its political aid, which it had been prepared to withdraw only slowly.

“It’s intense right now,” said Julia Coronado, founder of MacroPolicy Perspectives and former Fed economist. As she expects workers to return, she noted that the report would appear worrisome to anyone already worried about inflation. “These priorities are in blatant conflict. “

Jerome H. Powell, the chairman of the Fed, and his colleagues inject $ 120 billion into the markets each month and keep interest rates close to zero to keep borrowing costs cheap and credit fluid, helping thus fueling demand and encouraging employers to develop and hire.

Officials have signaled that they will soon start slowing bond buying – something they could announce as early as November based in part on progress in the labor market. September’s jobs report is unlikely to thwart those plans, which officials said were based on cumulative job gains and not on single-month data. The United States has recovered more than 17 million jobs since the worst lows of the pandemic.

Yet Fed policymakers have repeatedly promised that even if they back down on bond purchases, they will continue to support the economy with low rates – their most traditional and powerful tool – for as long. that she will need their help. While rapid inflation looks set to persist and the labor market is slow to recover, they may still be forced to hike rates earlier than expected as employment picks up.

“This is not the situation we have been facing for a very long time, and it is a situation where there is a tension between our two goals,” Powell said in a recent public appearance. He later added that “managing this process over the next couple of years, I think, is the highest and most important priority, and it’s going to be very difficult. “

Central bank officials hope the jobs lost during the pandemic will return soon, but progress in recent months has halted and started as Delta variant-linked coronavirus infections have increased, pushing diners away from restaurants and causing school closures. Employers created 194,000 jobs last month, disappointing economists’ forecasts, which were counting on half a million.

Average hourly wages rose 0.6% in September from the previous month, more than economists in a Bloomberg survey had expected because potential workers were scarce.

“For people worried about inflation, Delta has dealt us a blow – both by reducing the supply of labor and putting upward pressure on wage rates” and ” at the same time, exacerbating the bottlenecks, ”Ms. Coronado said.

Inflation stood at 4.3% in August, well above the central bank’s target of 2% on average over time.

The price hike in 2021 was driven almost entirely by pandemic whims. Strong consumer demand for refrigerators and computers overwhelmed supply chains at the same time as coronavirus-related plant closures delayed parts production. This combination has resulted in shortages of items as diverse as rental cars and washing machines, driving up prices.

Officials still expect price pressures to prove temporary. But it has become increasingly clear that while drivers are mostly on time, they could linger for months. Shipping routes are struggling to catch up, pandemic epidemics continue to force factories to close and now rising commodity prices threaten to keep inflation high.

The Fed is watching closely to ensure that long-term inflation expectations remain at healthy levels. If consumers and investors come to expect higher inflation, they could change their behavior, creating a self-fulfilling prophecy.

Some key indicators of the outlook for consumer prices have started to increase. And Fed officials are also monitoring wage data, because when wages rise rapidly and companies have to raise prices to cover costs, it can trigger a cycle that blocks rapid inflation.

Today’s combination raises an unfortunate possibility: The Fed could find itself under pressure to raise interest rates and slow the economy before jobs fully rebound.

“The report looks set to leave Fed officials in an awkward position,” wrote Andrew Hunter, senior US economist at Capital Economics, in a research note after the publication.

There is little a central bank can do to stimulate better port capacity or more apartments, but it could arguably calm demand by raising interest rates. With fewer consumers buying condos, sofas, and patio furniture, factories, home builders and freighters could catch up, helping to ease cost pressures.

But higher rates would also slow business growth and hiring, trapping pandemic unemployed people on the fringes of the job market. That is why Mr Powell and his colleagues advise patience, in the hope of avoiding overreacting to a price hike that will run out.

At the time of their latest economic projections, the 18 Fed policymakers were evenly distributed, with half expecting one or more interest rate hikes by the end of next year, and half expecting them in 2023 or later. These dividing lines could harden in the future.