by Friday’s employment data suggested that wages are still rising rapidly as hiring remains strong, developments that could keep the Federal Reserve cautious as it contemplates its next move on interest rates.
Federal Reserve officials raised interest rates from near zero to a range of 5.25 to 5.5 percent between March 2022 and last July, but have held borrowing costs steady for months as they finally materialized progress toward slower inflation.
Central bankers have yet to rule out another rate hike, but most economists think their next step will be to reduce borrowing costs. Federal Reserve officials themselves have forecast three quarter-point reductions this year, but have offered few clues about when those cuts might begin. Investors have been betting that cuts could begin as soon as March.
While the Federal Reserve is likely to weigh the December jobs report when considering what’s next on policy, it is unlikely to be a critical factor. There will be two more jobs reports before the central bank meeting March 20 meetingFor example.
But the latest evidence on the labor market could give officials new reason to be cautious before declaring victory. Friday’s jobs report suggested the economy maintained surprising momentum into late 2023. Notably, average hourly earnings rose 0.4 percent from the previous month and 4.1 percent from a year ago. former. That was faster than the 3.9 percent expectation in a Bloomberg survey of economists.
Jerome H. Powell, chairman of the Federal Reserve, suggested last month that wage gains at the recent pace (up about 4 percent compared to the previous year—they were probably still slightly higher than is consistent with slow and steady inflation. If employers pay workers more, they can try to raise prices to cover those higher labor costs, keeping inflation high.
But Mr. Powell noted that wage gains had “been gradually cooling.” The new rebound is just one piece of information, but if it persists, it could call that trend into question.
Federal Reserve officials had also been encouraged by the recent slowdown in job creation, something Friday’s report offset. Employers added 216,000 jobs in December, more than economists had forecast, and the unemployment rate remained low.
Still, other signs have continued to suggest that the labor market is cooling somewhat: Job openings have been declining and employers themselves often report less stress when it comes to hiring.
At the Federal Reserve’s last meeting, “participants assessed that, while the labor market remained tight, it continued to achieve better balance,” according to minutes released this week. “Many noted that nominal wage growth had continued to slow broadly and that business contacts expected a further reduction in wage growth.”
While the Federal Reserve aims for maximum employment (and typically celebrates strong employment data), it is currently balancing that goal with its efforts to cool rapid inflation.
