Fed policymakers are debating how much more interest rates need to be raised to get inflation back on track quickly, a calculation that is highly dependent on the strength of the job market. likely to
Friday’s jobs report probably did little to change policymakers’ minds about the state of the labor market.
Employment growth has slowed, but wage growth remains stronger than usual. Average hourly wages for the year to June increased by 4.4% from the expected 4.2%, and the wage increase rate for May was revised upward. Fed officials are watching wage growth closely. They worry that if wage growth continues at an unusually high rate, it could be difficult to fully return higher inflation to the 2% target.
whats the logic? Firms paying their employees higher wages are more likely to try to raise prices to cover higher labor costs, and higher-income households are less able to pay higher prices. higher.
Fed officials have marveled at the economy’s resilience 16 months after it sought to slow the economy by raising rates to make borrowing more expensive. Although growth has slowed, the housing market is starting to stabilize and the job market remains exceptionally strong. plenty of opportunities And many workers need at least some bargaining power.
This resilience, and the stubbornness of rapid inflation, especially in services, is why policymakers expect interest rates to continue to rise, already above 5% for the first time in almost 15 years. . Officials have hiked rates more modestly this year than they did in 2018, with the Fed’s meeting in June for the first time in 11 meetings. But policymakers have said they still expect more rate hikes, even if the pace slows.
“It may make sense to skip the meeting and act more slowly,” said Dallas Fed President Rory K. Logan. during a speech This week, he said it was important for officials to continue raising rates.
“Even if inflation and the labor market develop more or less as expected, the outlook will not change significantly,” he added.
Fed official expected in June They expected two more rate hikes this year (assuming rate hikes occur in quarter-point increments) and a slight softening in the labor market.they saw unemployment rises It will rise to 4.1% from 3.6% in June.
Investors are widely expecting Fed officials to raise rates at their July meeting, and a stronger labor market could help shape the outlook thereafter. Policymakers won’t release new economic forecasts until September, but Wall Street will monitor how policymakers react to economic developments to determine whether new moves are likely this year. right.
