Strong US Jobs Data Keeps Fed on Track for May Hike By Reuters

Written by Howard Schneider

WASHINGTON (Reuters) – A record low U.S. unemployment rate and rising wages are likely to keep the Federal Reserve on track to raise interest rates another quarter of a percentage point next month as risks of a financial crisis diminish and inflation fears persist. high.

Job growth is slowing in the United States, something Federal Reserve officials predicted by increasing borrowing costs. However, the economy added 236,000 jobs in March and averaged 345,000 jobs per month in the first quarter, well above the level the central bank considers consistent with its 2% inflation target.

The unemployment rate fell to 3.5% last month from 3.6% in February, despite growth in the active population by half a million and a slight increase in the participation rate. Average hourly earnings increased 0.3%, slightly faster than the previous month.

The latest jobs report provided an overview of the labor market Fed officials will receive before their policy meeting on May 2-3, and marks another step in refocusing the debate on curbing inflation after the potential crisis triggered by the collapse of two regional banks.

Investors in contracts tied to the Federal Reserve’s benchmark interest rate have increased their bets that rates will continue to rise, with nearly a two-thirds chance of a quarter-point rise next month.

Kathy Bostancic, chief economist at Nationwide, wrote shortly after the report was released: “Despite job numbers weak in the run-up to the non-farm payroll report, job growth has not yet eased, although there are clear signs of continued moderation.” .

Bostancic said the Fed would generally be pleased with the data, but added that it “still supports another rate hike in May, which we think could be the last tightening cycle. Followed by a prolonged pause.”

In another possible sign of easing inflationary pressures, the annual rate of wage growth slowed to 4.2% in March from 4.6% in the previous month, continuing a recent downward trend.

Economists polled by Reuters had expected an increase of 239,000 jobs in March, with hourly wages rising 4.3 percent annually and an unemployment rate of 3.6 percent.

By comparison, salary growth in the decade prior to the COVID-19 pandemic was $180,000 a month, and wage growth has hovered near the 2-3% range that Fed monetary policy officials consider consistent with its 2% target. The annual increase in the personal consumption expenditures price index.

The PCE price index rose 5% year-on-year in February, or 4.6% excluding volatile food and energy prices, too high for the Fed’s liking and slowly improving in recent months.

Ahead of the report, Gregory Daco, chief economist at EY Parthenon, said he hoped the data would show that “a tight labor market will continue to be a feature of this business cycle” and push the Fed to continue raising interest rates.

still hot?

The question now is how long this business cycle can last, and whether the seeds of a severe slowdown are taking root.

The projected average unemployment rate for the end of 2023 by Federal Reserve officials at their meeting in March was 4.5%, indicating a relatively sharp rise in unemployment that would in the past signal an ongoing recession.

Fed officials will never say that their goal is to cause a recession. But they were also adamant that, in the present situation, there are too many jobs to fill and too few workers available, a recipe for increasing wages and prices to begin to reinforce each other the longer the situation goes on.

“The labor markets are still pretty, I would say, hot. Unemployment is still very low,” Boston Fed President Susan Collins said in an interview with Reuters last week. “Until labor markets calm down, at least somewhat, we are not likely to see the slowdown that we would probably need” to bring inflation down to the Fed’s target.

Change, however, may be coming.

Daco pointed to the drop in average weekly hours worked in February, a statistic he said should be watched for evidence of a “more worrying slowdown in the labor market.” Average working hours per week decreased in March to 34.4 hours from 34.5 hours in the previous month.

Payroll provider UKG said shift work among its sample of 35,000 companies fell 1.6% in March, an unseasonably adjusted figure that the company’s vice president, Dave Gilbertson, said indicated positive overall job growth but not “as hot as it has been”. .

The job gains in January and February were larger than expected and produced a brief moment when Fed officials thought they might have to raise interest rates again, a sentiment that has faded after the recent bankruptcy of silicon. Valley Bank and Signature Bank.

For their part, economists at the Conference Board pointed out that a new index that includes economic, monetary and demographic data showed that 11 of the top 18 industries are at medium to high risk of layoffs this year.

The Conference Board’s economists were negative in saying that a recession is likely to start between now and the end of June, though “it may still be some time before widespread job losses occur,” said Frank Stimers, chief economist. from the group.

Eye on services

Some of that may be in the works.

On Thursday, the Labor Department released revisions as measured by unemployment claims rolls, showing that more than 100,000 people have recently received more government aid than previously expected.

In addition, outside of the pandemic, the nearly 270,000 layoffs announced this year through March were the highest quarterly total since 2009, said offshore maker Challenger, Gray & Christmas.

But for the Federal Reserve, this is only part of the puzzle. The relationship between “stagnation” in the labor market and low inflation may depend on where and for what period job growth slows.

A new study from the Kansas City Fed suggests that the process may be more difficult than expected, because the service sector industries that are currently driving wage growth and inflation are the least sensitive to changes in monetary policy.

If sectors such as manufacturing and home construction follow the usual patterns when the Federal Reserve raises interest rates, credit becomes more expensive and demand and employment slow. But Kansas City Federal Reserve economists Carly Dilts Steadman and Emily Pollard write that service industries responsible for most of US economic output require more labor and are less sensitive to higher interest rates.

“The services sector, in particular, has contributed significantly to recent inflation, reflecting current imbalances in labor markets, where supply remains weak and demand remains strong,” they wrote.

“Because production of services tends to be less capital-intensive and consumption of services is less likely to be financed, it also tends to respond less quickly to higher interest rates. Thus, monetary policy may take longer to affect a major source of current inflation.”

(Reporting by Howard Schneider; Editing in Spanish by Flora Gomez and Ricardo Figueroa)