Strong wage and job growth keeps Fed on track for major rate hike

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

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

Fed officials spent the pre-pandemic years applauding any strong wage bill, but recent wage increases, while not enough to keep up with inflation, have been fast enough to make it difficult for rapid inflation to slow toward inflation. the 2 percent annual increase of the central bank. goal. That’s because, the more they pay, the more companies typically try to cover their costs by raising prices.

The new wage and employment data is likely to bolster the Fed’s view that the economy remains strong and inflationary pressures continue, keeping it on track for a sharp 0.75 percentage point rate hike — also known as 75 basis points — in July. Central bankers are rapidly raising interest rates as they try to control price increases.

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

Fed officials raised their key rates by 0.75 percentage point for the first time in June, the largest increase since 1994, as new data showed inflation to be surprisingly fast and persistent. A choir of officials have in recent days said they would support a second move of similar size. Policymakers usually only adjust their policies in quarter-point increments.

Officials still want to achieve a so-called ‘soft landing’, in which hiring and wage increases gradually slow down and moderate both consumer demand and rapid price increases, but without sending the economy into a painful recession. But they have also been clear that they will cause economic pain if it is necessary to curb inflation.

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

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

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

Still, Wall Street remains concerned that the Fed will send America into a tailspin in its efforts to lower inflation. Shares fell after the release of the employment data, likely because investors interpreted them as a sign that the Fed would continue its aggressive campaign to contain the economy as workforce and wage growth remain robust.

Wages for non-managers, which economists watch closely as a gauge of underlying labor market strength, climbed a rapid 6.4 percent from a year earlier, the new report found. That pace is slowing slightly, but it’s still much higher than normal — and could keep inflation high if it continues.

“Wages are not primarily responsible for the inflation we see, but they would be very important going forward, especially in the service sector,” said Fed Chair Jerome H. Powell. at his press conference in June.

“If you don’t have price stability, the economy really won’t work the way it should,” he added later. “It won’t work for people – their wages will be eaten.”

Goldman Sachs economists have estimated that using their wage growth tracker — which is a few tenths of a percent higher than the general estimate of the average hourly wage, at 5.4 percent in the most recent measurement — should probably slow wage gains to about 3.5 percent to be in line with the Fed’s inflation target.

While the Fed is aiming for an average price increase of 2 percent, inflation has been well above that amount for more than a year. The Personal consumption expenditure index The measure excluding food and energy prices, which the Fed monitors for a sense of underlying inflationary trends, climbed 4.7 percent in the year through May.

And that’s the least dramatic of the major inflation measures. Prices climbed by 8.6 percent in the year through May, as measured by the consumer price index – buoyed by large increases in grocery and gas costs – and the June issue, released next week, may show further gains.

Central bankers are increasingly concerned that those high inflation rates will seep into consumer inflation expectations, making price increases even more difficult to stamp out. Once workers and companies begin to believe that prices will rise rapidly year after year, they can change their behavior — asking for bigger wage increases and making more regular cost increases — in ways that make inflation a more permanent feature of the U.S. economy.

Many officials at the June meeting of the Fed’s policy-making committee believed that a significant risk facing the committee now was that elevated inflation could anchor if the public questions the committee’s determination to adjust policy direction where necessary. ‘, according to the minutes released on Wednesday.

If the Fed raises interest rates by 0.75 percentage points this month, that would put interest rates in a range of 2.25 to 2.5 percent. Central bankers have signaled that they probably drive up 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 significantly more expensive, and there are early signs that they are beginning to permeate the economy more broadly as construction moderates and new factory orders dwindle.

While weakening economic data has fueled speculation that the economy could slip into recession – and downturn fears have gripped Wall Street in recent weeks – there are also signs of continued economic strength. Friday’s report only strengthened them.

“Wage growth remains high and the job loss rate is low,” Nick Bunker, director of economic research at the job site Indeed, wrote in response to the report. “One day we will see another recession, but today is not that day.”

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

“Supply and demand will be rebalanced and inflation will return to our longer-term target of 2 percent,” said Mr Williams. “This can take some time and it can be quite a bumpy road.”