On Sept. 2, the Labor Department reported that employers added 315,000 jobs in August. For the past two years, we have experienced robust job growth. The U.S. has regained the 22 million jobs that we lost during the pandemic. This strong employment report will likely keep the Federal Reserve on track to raise interest rates later this month to combat inflation. The annual inflation rate is currently 8.5%, which is a 40-year high.
Federal Reserve officials worry that our job market is overheated. They want to cool it off in order to bring down inflation, but not so much that it causes unemployment to skyrocket. To date, the job market has remained strong, even as other parts of the economy, such as the housing market, have slowed sharply.
Sarah House, an economist at Wells Fargo, emphasized the strength of our economy: “The fact that we are still putting up gains of over 300,000 even as we have recovered all the jobs lost, that is still a really impressive feat. Hiring remains robust but on a more sustainable basis.” There are currently twice as many open jobs as job seekers.
The Wall Street Journal, in an article “Job Market Shows Sign of Easing,” reported that the jobless rate rose to 3.7% in August from a half-century low of 3.5% in July. The rise in the unemployment rate is attributable to more workers entering the labor force because of rising wages and abundant job opportunities. The percentage of adults either working or seeking employment rose to 62.4%.
Monthly wage growth declined to its slowest pace in six months. Average hourly earnings for private-sector workers rose at an annualized rate of 3.8% in August. To put this in perspective, wages had grown 5.2% over the past year.
The job market might weaken in response to the efforts by the Federal Reserve to tame inflation. Currently, price increases are running near a four-decade high. At the Fed’s summer gathering in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell warned that the Fed’s moves would hurt the labor market and the overall economy. He said, “While rate increases would bring down inflation, they will also bring some pain to households and businesses.” He added, “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Oscar Munoz, a strategist at TD Securities, said, “Powell wanted to put to bed the idea that the Fed will soon be done with its tightening cycle.”
New York Fed President John Williams, in an interview with the Wall Street Journal, said “that slowing inflation is likely to require lifting the fed-funds rate above 3.5% and holding it at that level through next year. Our focus is on getting inflation back down to 2%, and the current level of price pressures is far too high.” Williams went on to say that he expects inflation to fall to between 2.5% and 3% next year. Stated differently, Williams believes that interest rates need to exceed the inflation rate.
The current expectation is that the Federal Reserve will increase interest rates either 50 basis points or 75 basis points at their next meeting on Sept. 20-21. The goal of higher interest rates is to make it more expensive for people and businesses to borrow and spend money. This could lead to slower economic growth and an easing of price pressures.
President Biden hailed the jobs report. He said, “Jobs are up, wages are up, people are back to work. … America has some really good news going into Labor Day weekend.”
Originally published in the Sarasota Herald-Tribune
