US jobs report gives life to Fed’s ‘soft landing’ scenario

NEW ORLEANS/SAN FRANCISCO, Jan 6 (Reuters) – A jump in the labor force and softening wage growth suggest the U.S. labor market is starting to move as the Federal Reserve had hoped, improving supply and demand for workers. helps balance and fight inflation.

December employment data released on Friday brought a sign of relief after a year in which many key job market indicators stood at levels the U.S. central bank deemed inconsistent with stable prices.

About 165 million people were either in work or looking for work last month, signaling a long-awaited improvement in labor supply. U.S. firms added 223,000 payroll jobs during the year, hiring 4.5 million people, surpassing the post-World War II total of 6.7 million in 2021.

Meanwhile, hourly wages — the price of labor — rose at the slowest annual pace in 16 months and have declined by a full percentage point since the end of the first quarter of 2022. Average weekly earnings rose 3.1%, the slowest pace. From May 2021.

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Simona Mocuta, chief economist at State Street Global Advisors, said the jobs report “is the epitome of the soft landing narrative — the idea that you can have a strong labor market with slowing wage growth.”

“In this situation, you can have your cake and eat it too,” he said, adding that earnings growth is simmering but there is no collapse in labor demand or widespread layoffs.

Ideally, he said, this should allow the Fed to slow and stop rate hikes soon.

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Traders took the report as evidence that the Fed’s work was nearing its end. US stocks rose and interest rate futures traders added to bets that the Fed will further slow rate hikes from Jan. 31 to Feb. 31. 1 meeting, and as a result, they will not reach the 5.00-5.25% policy rate range that almost all US central bankers have indicated they believe will be needed to bring down inflation.


However, Fed policymakers took a decidedly more sober view of Friday’s data, suggesting they are bullish on further rate hikes and will want to see more data confirming easing price pressures before ending tightening.

On Friday, Atlanta Fed President Raphael Bostic said he expects the policy rate to reach a range slightly above the 5.00% range he and his colleagues hinted at last month and remain “well” into 2024.

That’s in line with traders’ expectations for a policy rate of 4.75%-5.00%, currently in the 4.25%-4.50% range, and with the Fed starting to cut borrowing costs later in the second half of this year. completely contradicts their expectations.

“Today, I would be comfortable with either a 50 or 25 (basis point increase),” Bostic told CNBC, referring to the Fed’s impending rate-setting decision. “If I start to hear signs that the labor market is starting to ease a little bit in terms of tightness, then I might lean more toward the 25 basis point position,” he said, at which point he sees wages as a driver of inflation.

Minutes of last month’s policy meeting, released this week, reflected the Fed’s concerns about how the labor market is affecting the inflation fight, with officials worried that components of core inflation are “likely to remain elevated” if the labor market remains too tight. .”

The US unemployment rate fell to a pre-pandemic low of 3.5% in December.

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The employment data, though covering just one month, nonetheless offered a welcome relief in some of the dynamics weighing heavily on officials’ minds to continue to moderate inflation, which has been running at the highest rates in 40 years. in the middle of last year.

Inflation, the Fed’s preferred measure, the personal consumption expenditures price index, rose to an annual 5.5% in November, lower than at the start of 2022 but still more than twice the central bank’s 2% target.

The Fed pulled out all the stops last year to curb inflation, raising the policy rate from near-zero levels in March to its current level in the fastest series of rate hikes in more than a generation.

More inflation data expected next week will play into the Fed’s calculations of where to go in the coming months, and the Labor Department’s Consumer Price Index is expected to show further easing of price pressures in December. The annual CPI rate is expected to fall to a 14-month low of 6.5% in December from 7.1% the previous month, and the rate is forecast to be unchanged month-on-month, a sharp turnaround for a measure. just six months ago it was running at its fastest pace since the early 1980s.

“We have seen a significant slowdown in the pace of inflation in the United States,” Robin Brooks, chief economist at the Institute of International Finance, said Friday at the annual meeting of the American Economic Association (AEA) in New Orleans. “It’s a very real development. And it’s more or less continued.”

“That’s really good news.”

That may be true, but Fed officials, caught flat-footed in their initial reaction to rising inflation, are far from ringing victory bells.

“The latest data shows that wage growth actually started to slow down a bit last year,” Fed Governor Lisa Cook said at the EMEA meeting.

However, he said, “despite some recent encouraging signs, inflation remains very high and therefore a major concern.”

Reporting by Howard Schneider and Ann Saphir; Additional reporting by Lindsay Dunsmuir; Edited by Dan Burns and Paul Simao

Our standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

He covers the US Federal Reserve, monetary policy and economics, and is a graduate of the University of Maryland and Johns Hopkins University.

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