Strong Wage and Jobs Growth Keeps Fed on Track for Big Rate Increase

Wages soared in June and employers continued to hire. This is the latest evidence that the labor market remains strong as the Federal Reserve attempts to cool the economy and curb inflation. This data suggests that central banks are well on their way to ultra-large interest rate volatility at their July meeting.

Employers added 372,000 workers last month, according to data released Friday. This is less than in May, but more than economists expected. At the same time, the average hourly wage for the year to June increased by 5.1%, slightly down from 5.3% for the year to May. Economists in Bloomberg’s study expected a larger cooldown of up to 5%.

The Federal Reserve has spent years supporting all the strong wage numbers before the pandemic, but recent wage increases aren’t enough to keep up with inflation, but rapid inflation is the central bank. Goals are fast enough to make it difficult to slow down towards an annual rate of 2%. That’s because when a company pays more, it usually tries to cover the cost by raising the price.

New wage and employment data show that the economy remains strong, inflationary pressures continue, and the Fed is on track for a significant 0.75 percentage point (also known as 75 basis points) rate hike in July. May strengthen your view of. Central banks are raising interest rates rapidly as they try to curb inflation.

Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said: CNBC interview after the report.

The Federal Reserve first raised the policy rate by 0.75 percentage points in June, as new data showed that inflation was surprisingly rapid and stubborn. A choir of officials has recently said they support a second move of similar size. Policy makers usually adjust their policies only in quarter-point increments.

Authorities still gradually slow down employment and wage growth, helping to mitigate both consumer demand and sharp price increases, but often “soft landing” without putting the economy in a painful recession. I want to design something called. But they also found that they would cause financial distress if inflation needed to be reduced.

In a speech in Puerto Rico on Friday, Federal Reserve Bank of New York Governor John C. Williams said, “Price stability is absolutely necessary for the economy to reach its potential and maintain maximum employment in the medium term. It’s essential. ” “I want to be clear, this is not an easy task. We have to be resolute, and we can’t run short.”

Bostic seems to see Friday’s report as a sign that the Fed’s approach is working as planned so far, hiring at a time when the Fed wants to see economic easing. Pointed out that it slowed down a little.

“We are starting to see the first signs of slowdown, which is what we need,” Bostic said. “Some of today’s numbers suggest that it’s happening, and that’s a positive sign.”

Still, Wall Street continues to be concerned that the Fed will put the United States in recession to lower inflation. After the announcement of the number of jobs, stocks fell. Perhaps investors have interpreted it as a sign that the Fed will continue its aggressive campaign to constrain the economy, as employment and wage growth remains strong.

Wages for non-managerial positionsEconomists are watching carefully as a measure of the underlying strength of the labor market, rising 6.4% year-on-year, the new report said. The pace is a bit slower, but it’s still much higher than normal, and if it continues, it can continue to raise inflation.

“Wages are not the main cause of inflation we see, but they will be very important in the future, especially in the services sector,” said Jerome H. Powell, chairman of the Federal Reserve Board. Said. At his press conference In June.

“Without price stability, the economy doesn’t really work as expected,” he added later. “It doesn’t work for people — their wages are eaten up.”

Goldman Sachs economists estimate that using a wage increase tracker is a few tens of minutes higher than the overall average hourly wage estimate and 5.4% in the latest measurements, but wage increases are probably about. You need to slow down to 3.5. Percentage consistent with the federal inflation target.

The Fed is aiming for an average price increase of 2%, but inflation has been well above that for over a year. The Consumer Expenditure Index Measures, excluding food and energy prices, which the Federal Reserve is monitoring the underlying sense of inflation, rose 4.7% over the year to May.

And it’s not the most dramatic of the major inflation measures.price 8.6 percent up The year to May, measured by the Consumer Price Index (supported by significant increases in food and gas costs), and June, which is scheduled for release next week, could rise further. I have.

Central banks are increasingly concerned that these high inflation readings will permeate consumer inflation expectations, making it even more difficult to curb price increases. Workers and businesses can change their behaviour, in a way that makes inflation a more lasting feature of the US economy, as they begin to believe that prices will rise rapidly year after year.

At a June meeting of the Fed’s policy-making committee, many officials said, “The significant risks facing the committee now question the committee’s resolutions to help the public adjust their legitimate policy stance. We have determined that rising inflation could take hold if we begin to show. “According to the minutes released Wednesday.

If the Fed raises interest rates by 0.75 percentage points this month, interest rates will be in the range of 2.25 to 2.5 percent.Central bank They are probably By the end of the year, we will boost borrowing costs by another percentage point.

These rate hikes make mortgages so expensive that they are already weighing on the housing market. There are early signs that mortgages are beginning to penetrate the economy as a whole as construction eases and new factory orders recede.

The weakening of economic data has sparked speculation that the economy could head into recession, and while fears of a recession have hit Wall Street in recent weeks, there are also signs of continued economic strength. Friday’s report served only to reinforce them.

“Wage growth is still rising and the unemployment rate is low,” said Nick Banker, director of economic research at the job site, in response to the report. “Someday we’ll see another recession, but today isn’t that day.”

But Williams of the New York Fed suggested that even the meaningful signs of an economic slowdown may not be enough to deter the Fed.

“The balance between supply and demand will be restored and inflation will return to its long-term target of 2%,” Williams said. “This can be time consuming and can be a bumpy road.”