The American employment report for the month of July, which was contrary to expectations for a slowdown in the economy, will make it difficult for the Federal Reserve to withdraw from the pace of interest rate increases, which it set for itself ahead of the upcoming policy meeting in September.
The Fed is trying to slow down economic activity and employment to reduce inflation that has reached a 40-year high with an annual rate of 9.1%. The employment report published on Friday shows that the economy is still operating with great vigor, increasing the likelihood that Fed officials will conclude that they need to raise interest rates to a higher level and keep interest rates higher for a longer time to cool the economy.
The Fed raised interest rates by 0.75% at the last meeting, following a similar increase in June, which was the largest since 1994. “Another big increase could happen at our next meeting,” Powell said at a press conference on July 27, “but the decision will depend on the data we get between Now leave.”
A number of senior Fed officials said the central bank may only raise interest rates by half a percent in September, and economists and analysts estimated that the bank would slow rate hikes soon. But that depends critically on a slowdown in economic activity, especially employment, and Friday’s report shows no such signs.
Since the Federal Reserve meeting in July, labor market data has been even stronger than previously reported, and employment continues to rise in the US economy. Employers added 428,000 jobs in July, thus regaining all the jobs they lost since February 2020. Also, unemployment dropped to 3.5% compared to 3.6% in the previous four months.
Despite previous estimates: wages continue to grow
The increase in wages was also stronger than economists expected in July. The average hourly wage increased by 0.5% compared to June and by 5.2% compared to the year before. June wage growth was revised upwards, indicating that earlier data had overestimated the slowdown in wage growth.
A separate report by the Ministry of Employment on employee wages published on July 29 also showed that the idea that salary growth has slowed down is not true.
The data on changes in workers’ wages is especially important to the Fed right now because of concerns that companies are raising wages only because they can pass on higher labor costs to consumers in the current inflationary environment. Taken together, the two employment reports could feed fears of an upward spiral in prices and wages.
The governors of the bank this week rejected investors’ expectations for an earlier end to the interest rate hike policy. Chicago Fed Chief Governor Charles Evans told reporters this week that if the economy slows as he expects, he would support a 0.5 percent rate hike at the central bank’s September meeting. But he said that 0.75 percent is also on the table if the economic data is hotter than expected.
How much will the recession moderate?
At a press conference in late July, Powell said there was evidence that the US economy was slowing as needed to bring inflation down from a four-decade high. “There is a feeling that the job market is coming back to balance … but this is only the beginning of balance,” Powell said. Following this, a rally began in the markets because investors began to bet that the Fed would stop raising interest rates sooner than they expected.
He added that in order to slow down and then stop the interest rate hikes, the governors will have to be absolutely sure that inflation is going to return to the 2% target they set. “We cannot avoid these measures. It really has to happen,” he said.
Powell also said the outlook remains unusually uncertain, which could make predicting the central bank’s upcoming decisions difficult. “We think demand is moderating. We really think so. To what extent is it moderating? We are not sure,” he said. Consumers still have savings left over from the days of the pandemic, and the job market is “very hot,” Powell added. “So it’s a situation where we think the economy should work really well in the second half of the year, but we’ll have to prove it. We don’t know yet.”