Big US job gains give Fed ‘a lot more work to do’ in taming inflation

Big US job gains give Fed ‘a lot more work to do’ in taming inflation

The Federal Reserve will face more pressure on its battle to cool the US economy with sharp interest rate hikes after the latest batch of labor market data showed an unexpected acceleration in job growth and strong wage growth.

The figures released on Friday eased concerns that the US economy was slowing sharply or already in recession after two consecutive quarters of declining output this year. However, it will raise concerns that high inflation could take hold as wages continue to rise, requiring even more central bank intervention.

The Fed has already moved the key interest rate up from the trough of the coronavirus pandemic to a target range of 2.25 percent to 2.5 percent this year, including two consecutive increases of 0.75 percentage points in June and July.

On the back of the latest jobs report, economists and Fed watchers say the likelihood of another aggressive rate hike next month has increased, although the central bank will still closely scrutinize upcoming economic data, including inflation figures due next week.

“Today’s numbers should ease fears of a recession, but reinforce concerns that the Fed has a lot more work to do, and we now think a 75 basis point hike in September looks likely. The inflation concerns motivating the Fed will only be amplified by this jobs report,” Michael Feroli, senior economist at JPMorgan, wrote in a note Friday.

“Jobs have not declined at all in response to Federal Reserve tightening. This is a double-edged sword,” added Michael Gapen, chief US economist at Bank of America, noting that while the chance of a “closer recession is lower”, the “risk of a hard landing” is increasing.

David Mericle, chief US economist at Goldman Sachs, said the report cleared up some “ambiguity” over the strength of wage growth in the US economy, suggesting it was not easing as much as the Fed might have hoped.

“The overall message is that wage growth is going sideways at a rate that is probably a couple of percentage points stronger than would be consistent with achieving 2 percent inflation,” the Fed’s long-standing inflation target, he said. “The Fed has even further to go than we thought before today.”

Fed Chairman Jay Powell is expected to present his latest thinking on the course of US interest rates and the central bank’s strategy to bring down inflation at the annual Jackson Hole, Wyoming, conference set for late August.

During his last press conference in July, Powell said that “another unusually large increase” in interest rates in September “may be appropriate” but that the decision had not been made.

“It’s one we’re going to make based on the data we see. And we’re going to make decisions on a meeting-by-meeting basis,” he added.

Movements in the financial market may also be a factor in the Fed’s next move. Traders began to price in expectations of higher interest rate hikes after the jobs data, predicting that rates will peak in March at 3.64 percent, compared with the 3.46 percent expected before the report. Fed fund futures show that the chances of an increase of 0.75 percentage points in September have risen to 67 percent, compared to 33 percent on Thursday.

While the strong jobs number adds pressure on the Fed, it was welcomed by the Biden administration, as it means a sharp economic slowdown is less likely ahead of November’s midterm elections.

It comes as Congress prepares to vote on a $700 billion package of measures designed to curb inflation by raising taxes on big corporations, reducing prescription drug costs and reducing the budget deficit — though it would also increase spending on clean energy incentives to combat climate change.

“This bill is a game changer for working families and our economy. I look forward to the Senate taking up this bill and passing it as soon as possible,” Biden said Friday.

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