Dhe Federal Reserve chief Jerome Powell sees his monetary policy as confirmed by the latest surprisingly positive labor market data. He made that clear at an Economic Club event on Tuesday in Washington. The Fed raised interest rates by 0.25 percentage points last week and announced further interest rate hikes. This week, new economic data show that the unemployment rate fell to a record low of 3.4 percent in January. More than half a million additional jobs were created in January alone, while the number of weekly working hours increased. In addition, the usual adjustment of the statistics at the beginning of the year showed that the level of employment was several hundred thousand higher than assumed.
The fact that Powell didn’t sharpen his rhetoric despite the new data provided a boost to stock prices. Investors had feared Powell’s words could pave the way for a tougher course.
In fact, the overall situation remains confusing. The labor market data in itself point to an economic boom in the USA. Around 5 million vacancies could currently not be filled purely mathematically because there are only half as many job seekers as vacant jobs, said Powell. At the same time, until recently it was still reasonably certain that the US was heading for a recession. The International Monetary Fund (IMF), for example, predicts this as the most likely scenario. Investment banks like Goldman Sachs, on the other hand, see the probability of a recession shrinking to 25 percent in the light of the new job market figures.
It is also not entirely clear why wages are not rising faster but actually more slowly than recently. With labor markets bordering on full employment, one would expect wages to rise faster because workers have more market power. But that happens less than expected.
One possible explanation is that companies are now holding on to well-trained workers, even when they are underemployed for economic reasons. With this policy, they ensure that they have enough talent on board when things pick up again. At the same time, underemployed workers may have little leeway to push through higher wages, at least if they want to stay in the company.
Powell reiterated his observation from last week that monetary policy is slowly starting to work. The prices for goods in particular are falling, and he also expects price reductions in the real estate sector. He sees no deflationary development in the service sector, which is the largest in the economy at 56 percent. This leads him to believe that the Fed still has a long way to go in fighting inflation. He expects the inflation rate to fall sharply from 5 percent this year and to settle close to the 2 percent target next year. This, Powell also makes clear, will not be shaken.