Strong Wage and Jobs Growth Keeps Fed on Track
for Big Rate Increase
The Federal Reserve is trying to cool down the economy
to bring inflation under control, but the job market is still going strong.
Jeanna
SmialekJim Tankersley
By Jeanna
Smialek and Jim Tankersley
Published
July 8, 2022
Updated
July 9, 2022, 3:14 a.m. ET
https://www.nytimes.com/2022/07/08/business/economy/wages-jobs-fed-rates.html
A
surprisingly robust June employment report reinforced that America’s labor
market remains historically strong even as recession warnings reach a fever
pitch. But that development, while good news for the Biden administration, is
likely to keep the Federal Reserve on its aggressive path of interest rate
increases as it tries to cool the economy and slow inflation.
Today’s
world of rapid price increases is a complicated one for economic policymakers,
who are worried that an overheating job market could exacerbate persistent
inflation. Instead of viewing roaring demand for labor as an unmitigated good,
they are hoping to engineer a gradual and controlled slowdown in hiring and
wage growth, both of which remain unusually strong.
Friday’s
report offered early signs that the desired cooling is taking hold as both job
gains and pay increases moderated slightly. But hiring and earnings remained
solid enough to reinforce the view among Fed officials that the labor market,
like much of the economy, is out of whack: Employers still want far more
workers than are available.
The new
data will likely keep central bankers on track to make another supersize rate
increase at their meeting later this month as they try to restrain consumer and
business spending and force the economy back into balance.
“We’re starting
to see those first signs of slowdown, which is what we need,” Raphael Bostic,
president of the Federal Reserve Bank of Atlanta, said in a CNBC interview
after the report was released. Still, he called the wage data “only slightly”
reassuring and said that “we’re starting to inch in the right direction, but
there’s still a lot more to do, and a lot more we’ll have to see.”
Fed
officials began to raise interest rates from nearly zero in March in an attempt
to make borrowing of many kinds more expensive. Last month, the central bank
lifted its policy rate by 0.75 percentage points, the largest single increase
since 1994.
Central
bankers typically adjust their policy only in quarter-point increments, but
they have been picking up the pace as inflation proves disturbingly rapid and
stubborn. While Fed policymakers have said they will debate a move between 0.5
or 0.75 percentage points at their meeting on July 26 and 27, a chorus of
officials have in recent days said they would support a second 0.75 percentage
point move given the speed of inflation and strength of the job market.
As the Fed
tries to tap the brakes on the economy, Wall Street economists have warned that
it may instead slam it into a recession — and the Biden administration has been
fending off declarations that one is already arriving. A slump in overall
growth data, a pullback in the housing market and a slowdown in factory orders
have been fueling concern that America is on the brink of a downturn.
The
employment data powerfully contradicted that narrative, because a shrinking
economy typically does not add jobs, let alone at the current brisk pace.
Mr. Biden
celebrated the report on Friday, saying that “our critics said the economy was
too weak” but that “we still added more jobs in the past three months than any
administration in nearly 40 years.”
Private
sector voices concurred that the employment report showed an economy that did
not appear to be tanking.
“Wage
growth remains elevated and rates of job loss are low,” Nick Bunker, economic
research director at the job website Indeed, wrote in a reaction note. “We’ll
see another recession some day, but today is not that day.”
The
contradictory moment in the economy — with prices rising fast, economic growth
contracting and the unemployment rate hovering near a 50-year low — has posed a
challenge for Mr. Biden, who has struggled to convey sympathy for consumers
struggling with higher prices while seeking credit for the strength of the jobs
recovery.
Mr. Biden’s
approval ratings have slumped as price growth has accelerated. Confidence has
taken an especially pronounced battering in recent months amid rising gas
prices, which topped $5 a gallon on average earlier this summer.
On Friday,
Mr. Biden emphasized that fighting inflation was his top economic priority
while also praising recent job market progress.
“I know
times are tough,” Mr. Biden said, speaking in public remarks. “Prices are too
high. Families are facing a cost-of-living crunch. But today’s economic news
confirms the fact that my economic plan is moving this country in a better
direction.”
But
unfortunately for the administration and for workers across America, tackling
high prices will probably come at some cost to the labor market.
As price
increases bedevil consumers at the gas pump and in the grocery aisle, the Fed
believes that it needs to bring inflation under control swiftly in order to set
the economy on a path toward healthy and sustainable growth.
The Fed’s
tool to achieve that positive long-term outcome works by causing short-term
economic pain. By making money expensive to borrow, the central bank can slow
down home buying and business expansions, which will in turn slow hiring and
wage increases. As companies and families have fewer dollars to spend, the
theory goes, demand will come into better alignment with supply and prices will
stop rocketing higher.
Officials
expect unemployment to eventually tick up as rate increases bite and the
economy weakens, though they are hoping that it will only rise slightly.
Fed
policymakers are still hoping to engineer what they often call a “soft
landing,” in which hiring and pay gains slow gradually, but without plunging
the economy into a painful recession.
But pulling
it off will not be easy — and officials are willing to clamp down harder if
that is what it takes to tame inflation.
“Price
stability is absolutely essential for the economy to achieve its potential and
sustain maximum employment over 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 cannot fall short.”
Stocks fell
after the release of the employment numbers, likely because investors saw them
as a sign that the Fed would continue constraining the economy.
“The
tremendous momentum in the economy to me suggests that we can move at 75 basis
points at the next meeting and not see a lot of protracted damage to the
broader economy,” Mr. Bostic said Friday.
Fed
officials are closely watching wage data in particular. Average hourly earnings
climbed by 5.1 percent in the year through June, down slightly from 5.3 percent
the prior month. Wages for non-managers climbed by a swift 6.4 percent from a
year earlier.
While that
pace of increase is slowing somewhat, it is still much higher than normal — and
could keep inflation elevated if it persists, as employers charge more to cover
climbing labor costs.
“Wages are
not principally responsible for the inflation that we’re seeing, but going
forward, they would be very important, particularly in the service sector,”
Jerome H. Powell, the Fed chair, said at his news conference in June.
“If you
don’t have price stability, the economy’s really not going to work the way it’s
supposed to,” he added later. “It won’t work for people — their wages will be
eaten up.”
Wage growth
may be slowing in retail and hospitality jobs.
Inflation
has been above the Fed’s target for more than a year. The Personal Consumption
Expenditures index measure excluding food and energy prices, which the Fed
monitors for a sense of underlying inflation trends, climbed 4.7 percent in the
year through May.
And that is
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, and
the June number, set for release next week, may show further pickup.
Central
bankers are increasingly worried that high costs are going to seep into
consumer inflation expectations, making price gains harder to stamp out. Once
workers and businesses start to believe that prices will climb rapidly year
after year, they may change their behavior, seeking bigger wage increases and
more regular price adjustments. That could make inflation a more permanent
feature of the American economy.
The Fed
wants to prevent that outcome. If it raises rates by 0.75 percentage points
this month, it would bring interest rates to a range of 2.25 to 2.5 percent,
and officials have signaled that they will likely push up borrowing costs by
another percentage point by the end of the year.
“Supply and
demand will be brought back into balance, and inflation will return to our 2
percent longer-run goal,” Mr. Williams said. “This may take some time and may
well be a bumpy road.”
Jeanna
Smialek writes about the Federal Reserve and the economy for The Times. She
previously covered economics at Bloomberg News.
@jeannasmialek
Jim
Tankersley is a White House correspondent with a focus on economic policy. He
has written for more than a decade in Washington about the decline of
opportunity for American workers, and is the author of "The Riches of This
Land: The Untold, True Story of America's Middle Class." @jimtankersley
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