Slowing US job growth offers some relief to the Fed

Sluggish monthly US job growth and labor force inflation provided some relief to the Federal Reserve as it looks for signs that the economy is slowing, but economists warn that a third straight rate hike of 0.75 percentage points later this month cannot be ruled out.

The world’s largest economy added 315,000 jobs in August, in line with economists’ expectations. That compares with 526,000 cut-adjusted jobs created in July, which helped hold the unemployment rate at its lowest level in several decades. The number of jobs added in June was also revised to 293 thousand jobs, from about 400 thousand.

Despite August’s gains, the unemployment rate rose 0.2 percentage point to 3.7 percent. As the size of the labor force swelled by 786,000, the number of people looking for work but still unemployed rose by 344,000. The labor force participation rate, which measures the proportion of Americans either employed or looking for work, rose as a result to 62.4 percent, but it It is still hovering below the pre-coronavirus pandemic level.

The data, released by the Bureau of Labor Statistics on Friday, confirms that the labor market remains strong, even as the Federal Reserve embarked on its tightest monetary policy tightening since the early 1980s.

“I think the Fed would like the fact that the labor force participation rate has gone up, but the biggest problem for them remains that 300,000 jobs a month is still too fast,” said Ajay Rajadiaksha, global head of research at Barclays.

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Faced with the highest levels of inflation in four decades, the central bank is debating how high interest rates should be and how long to keep them at a level that effectively restrains economic activity.

Within four months, the target range for the federal funds rate had jumped from nearly zero to between 2.25 percent and 2.50 percent, and many officials believe rates need to rise near or above 4 percent at some point to successfully tame inflation.

Now, the Fed faces the question of whether to extend its streak of gains by 0.75 percentage points for another meeting later this month or switch to a slower pace and implement a half-point adjustment at its September meeting.

“They clearly have a lot of work to do before them,” said Robert Dent, chief US economist at Nomura. “[But] I think they know they can’t keep walking 75 basis points forever.”

All eyes are on the next inflation report due later this month, but after the Fed enters a scheduled “blackout” period where it is limited in its public comment.

This report is “ultimately the Fed’s most important contribution at this point to their near-term discussions,” Dent said.

Most economists believe that a 0.75 percentage point interest rate hike in September is very much on the table, especially in light of President Jay Powell’s hyper-hawkish message last month that the central bank “will continue to do so” until it restores price stability.

Powell also acknowledged that the process would likely involve a sustained period of low growth, high unemployment and “some pain” for households and businesses.

For Veronica Clark, Citigroup economist, she said a third straight increase of 0.75 percentage points later this month would help validate Powell’s message and underscore the Fed’s commitment to eliminating price pressures.

“There is no clear indication, certainly not in the inflation data nor in the labor market data, to tell you that we are going to operate at a consistently slower core inflation pace,” she said. “In this sense, you need to be more aggressive, and if you have the option to do again [0.75 percentage point move]-Why don’t you take it? “

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Economists had expected a slower monthly job growth rate, especially since most of the losses from the pandemic had been offset. But employers are still severely understaffed, which means they have to compete fiercely to retain workers and hire new ones.

Data released earlier this week indicates that there are still about two vacancies for every unemployed worker, indicating a slight downturn in a very tight labor market.

As such, wages nationwide have risen sharply, sparking fears of a feedback loop as companies are forced to charge higher fees for their products and services to cover these expenses, leading workers to demand higher wages.

Average hourly wages rose again in August, with wages rising 0.3 percent for the month, or 5.2 percent year-over-year.

The number of professional and business services jobs increased by 68 thousand and employment in the healthcare industry increased by 48 thousand. Retail and manufacturing jobs also increased, while those for the leisure and hospitality sector showed little change. The same is true for the construction and transportation sectors.

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In financial markets, the yield on two-year US Treasury bonds, which is affected by interest rate expectations, fell 0.11 percentage point at 3.41 percent, after trading around 3.48 percent just before the jobs data was released. The S&P 500 gave up gains from earlier in the session to be almost flat during lunchtime trading in New York.

Additional reporting by Kate Dugwid in New York

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