As unemployment falls, interest rates rise more and more

New data showing the unemployment rate is falling and wages rising should cement – and possibly accelerate – the Federal Reserve’s plan ...

New data showing the unemployment rate is falling and wages rising should cement – and possibly accelerate – the Federal Reserve’s plan to start raising interest rates this year as it tries to curb high inflation.

The unemployment rate fell to 3.9% in December, based on data collected in a period well before the worst of the virus wave caused by Omicron.

Unemployment has peaked at 14.8% in April 2020, and had hovered around 3.5% for months before the start of the pandemic. The fact that it is returning to near normal levels so quickly has led many central bankers to determine that the United States is moving closer to what they believe to be “full employment,” even though millions of former employees have not yet re-entered the workforce. .

“This confirms the Fed’s conclusion,” said Diane Swonk, chief economist at Grant Thornton, after the report. “It’s a hot job market. “

Signs abound that jobs are plentiful but workers are hard to find: Job vacancies are at high levels, and the share of people leaving their jobs has just hit. a recording. Employers complain that they are having trouble hiring, and the shortage of workers has led many companies to cut hours or cut back on services.

As a result, employers started paying more to retain employees and attract new candidates. Average hourly wages rose 4.7% in the year through December, faster than economists in a Bloomberg survey expected and much faster than the typical rate of advance before the pandemic , which hovered around 3%.

These rapid wage gains are a signal to Fed officials that people who want a job and are available for work are usually able to find it – that the job market is what economists call “tight” and that workers potentials are relatively scarce – and that wages could start to pass on to prices. When businesses pay more, they can also charge their customers more to cover their costs.

Some Fed officials fear that rising wages and limited output could help keep inflation high – now at close to a Over 40 years. The combination of a healing labor market and the threat of price increases spiraling out of control has prompted central bankers to speed up their plans to withdraw political aid to the economy.

Fed officials are already slowing down the big bond purchases they used to support the economy. On top of that, they could hike rates three times in 2022, based on their estimates, and economists believe those increases could start as early as March. This would make loans for cars, homes and business expansions more expensive, slowing spending, hiring and growth.

“It makes sense to start as soon as possible,” said James Bullard, chairman of the Federal Reserve Bank of St. Louis, on a call with reporters Thursday, suggesting the measures could come very soon. “I think March would be a definite possibility.”

And officials have signaled that once the rate hikes begin, they could quickly start shrinking their balance sheets – where they hold the bonds they bought to fuel growth throughout the pandemic downturn. This would help raise long-term interest rates, strengthen rate hikes, and further slow lending and spending.

Economists speculated after Jobs reported that the new figures made an imminent rate hike even more likely and that the central bank might even be prompted to withdraw economic support more quickly as wages take off.

“We believe today’s report strengthens the case for the Fed launching its hike cycle in March,” Bank of America researchers wrote. “The economy appears to be operating below the maximum employment rate and inflation remains stable.”

Krishna Guha, economist at Evercore ISI, argued that the combination of rapidly falling unemployment and skyrocketing wages could even prompt central bankers to raise interest rates faster than once every three months – the fastest pace in their latest round of interest rate hikes, which ran from 2015 to 2018.

“The Fed may end up having to increase at a faster rate than the base of a quarterly increase,” Guha wrote.

New data released next week could further intensify that pressure: The consumer price index is expected to reach 7% in the year through December, according to a Bloomberg survey of economists, which would be the pace fastest increase since June 1982.

The White House is doing what it can to promote competition, unravel supply chains and lower prices at the margin, but inflation control is primarily the responsibility of the Fed, President Biden said in a statement. press conference Friday.

“I have no doubts that the Federal Reserve will act to achieve its twin goals of full employment and stable prices, and ensure that price increases do not take hold over the long term,” Biden said.

Investors will have the opportunity to hear first-hand from key Fed officials next week. Jerome H. Powell, whom Biden has re-appointed as Fed chairman, has confirmation audience Tuesday before the Senate Banking Committee. Lael Brainard, now Fed governor and Mr. Biden’s choice to be vice president, has a hearing Thursday.

Both are likely to point out the inequality of the recovery and recognize that millions of workers remain out of the workforce thanks to care responsibilities, virus fears and other pandemic barriers, as they have. done throughout the recession.

They will also probably note that overall hiring slowed in December: employers added 199,000 jobs, the weakest performance of the year, as they struggled to find workers. And Omicron poses a further downsizing risk, as November’s data predates the recent surge in virus cases that have kept restaurant diners at bay and shut down live performances.

But at the end of the day, it’s the falling unemployment rate that should remain the focus of the Fed’s concerns as it considers its next steps, economists believe.

“A rate hike in March seems pretty likely at this point,” said Julia Coronado, founder of research firm MacroPolicy Perspectives. When asked if there was a takeaway from the new data, she replied, “It’s just a tightening labor market. That’s it.”

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Newsrust - US Top News: As unemployment falls, interest rates rise more and more
As unemployment falls, interest rates rise more and more
Newsrust - US Top News
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