Friday’s jobs data indicated that wages are still increasing quickly as hiring remains robust, which could make the Federal Reserve cautious as it considers its next steps on interest rates.
Between March 2022 and last July, Fed officials raised interest rates from near zero to a range of 5.25 to 5.5 percent. However, they have kept borrowing costs steady for several months as progress towards slower inflation has materialized.
Although the possibility of another rate increase has not been ruled out by central bankers, most economists believe that the next move will be to decrease borrowing costs. Fed officials themselves have forecasted three quarter-point reductions this year, but they have not provided any hints about when these cuts might begin. Investors have been speculating that cuts could start as early as March.
While the December jobs report will likely be considered by the Fed when determining future policies, it is not expected to be a decisive factor. There will be two more employment reports before the central bank’s meeting on March 20.
However, the latest evidence regarding the labor market could give officials a reason to exercise caution before declaring victory. The jobs report from Friday suggested that the economy maintained a surprising level of momentum at the end of 2023. Notably, average hourly earnings increased by 0.4 percent from the previous month and 4.1 percent compared to a year earlier. This was faster than the expected 3.9 percent based on a Bloomberg survey of economists.
Fed Chair Jerome H. Powell stated last month that wage gains at their current pace, approximately 4 percent higher than the previous year, were likely slightly higher than what is consistent with stable and gradual inflation. If employers are paying higher wages, they may attempt to raise prices to cover the increased labor costs, thus contributing to inflation.
However, Mr. Powell mentioned that wage gains had been gradually cooling off. The recent increase is just one data point, but if it continues, it could question that trend.
Fed officials had also found solace in the recent slowdown in job growth, which was contradicted by Friday’s report. In December, employers added 216,000 jobs, surpassing economists’ predictions, and the unemployment rate remained low.
Nevertheless, other indicators continue to suggest a cooling in the job market: job openings have decreased, and employers report less difficulty in recruiting.
During the Fed’s last meeting, “participants assessed that while the labor market remained tight, it continued to come into better balance,” according to released minutes this week. “Many noted that nominal wage growth had continued to slow broadly and that business contacts expected a further reduction in wage growth.”
While the Fed aims for maximum employment and typically celebrates strong jobs data, it is currently balancing this goal with its efforts to curb rapid inflation.