Jobs Report Gives Powell a Little More Runway on Rates
The Federal Reserve’s runway for raising interest rates to tackle the worst inflation in 40 years just got a little bit longer after a Labor Department report Friday showed unemployment remained near generational lows in June.
That means the Fed is likely to deliver on another 75-basis-point increase in the fed funds rate this month and may have room to push rates toward 4% if needed. The bond market is wasting no time adjusting to that new reality.
As the latest report showed, predictions of the economy’s imminent demise have been greatly exaggerated.
Despite surging borrowing costs as a result of the Fed’s policies, nonfarm payrolls rose 372,000 last month, beating expectations and keeping unemployment at 3.6%, just a hair above the pre-pandemic low of 3.5%. Average hourly earnings remained fairly strong, climbing 0.3% from a month earlier as the previous month’s figure was revised up slightly. The three-month trend indicates wages are growing at a roughly 4.2% annualized pace, not quite enough to keep up with consumer prices but clearly above the level that the Fed will deem consistent with its 2% inflation target.
The report also came just days after another one showed there were still nearly two job openings for every unemployed person, and workers continue to quit their jobs at accelerated rates. Those features of the unusual post-pandemic economy have been a source of repeated concern for Fed Chair Jerome Powell, who is trying to avoid a situation in which wage pressure forces companies to raise the prices of goods even more to offset costs. Members of the Federal Open Market Committee that votes on monetary police have said they hope that they can cut openings without hurting employment too much, as they noted in the minutes of their June 14-15 meeting published this week:
In light of the very high level of job vacancies, a number of participants judged that the expected moderation in labor demand relative to supply might primarily affect vacancies and have a less significant effect on the unemployment rate.
Of course, it’s never quite that easy, and the picture for workers wasn’t all sunshine and roses. The jobs report includes a survey of work establishments as well as a household survey, which incorporates other workers including the self-employed, and the household measure showed a decline in jobs. As Bleakley Financial Group Chief Investment Officer Peter Boockvar noted, the unemployment rate stayed steady only because the denominator — the number of people who say they’re working or looking for work — also fell by a similar amount.
Overall, it’s no mirage that the economy is slowing, as recent manufacturing and personal spending data have suggested. That’s a feature, not a bug, of the Fed’s policies. Ideally, the Fed would love to slow the economy to a pace consistent with more stable prices without sending it into recession, but that’s a trick central bankers have rarely been able to pull off.
The unemployment rate may be one of the last places that economic trouble becomes evident, creating some peril if the Fed overemphasizes it in calibrating monetary policy. But its own projections show that unemployment will probably rise above 4%, which some economists view as a healthy and necessary part of the disinflationary process.
The upshot? Two-year Treasury yields were surging Friday as the market rushes to reverse the rally of the last couple of weeks. Market doves who thought the Fed would blink at the first sign of trouble were always misguided. Powell has made clear that he sees inflation as his primary concern and that he’s willing to cause some economic pain to rein it in. For all the caveats in Friday’s report, the fact that unemployment hasn’t even budged during the Fed’s interest rate campaign suggests that its runway may be even longer than previously expected.
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