Weak hiring and rising prices increase the risks for the Fed

A weak jobs report in September is unlikely to derail the Fed’s plans to slowly begin withdrawing some economic support this year. But it is the latest indication of the delicate balancing act the central bank is facing as it tries to keep inflation in check while allowing the labor market to recover.

The Federal Reserve has two functions: to promote maximum employment and to keep the inflation rate low and constant. In recent decades, inflation has been contained or even tepid, so central bankers have been able to give the labor market plenty of room to recover. But today, inflation is skyrocketing, and rising wages suggest that employers may need to keep raising prices to cover their costs. At the same time, millions of jobs are still lost compared to before the pandemic, and they are only declining.

These trends could prompt the Fed to make tough decisions about its policy assistance, which it has been preparing to backtrack only slowly.

“It’s intense right now,” said Julia Coronado, founder of MacroPolicy Perspectives and a former economist at the Federal Reserve. And while she expects workers to return, she noted that the report would sound worrisome to anyone already worried about inflation. “These priorities are in stark conflict.”

Jerome H. Powell, Fed Chairman, and his colleagues have been pumping $120 billion into the markets each month and keeping interest rates near zero to keep borrowing costs cheap and credit flowing easily, helping fuel demand and encouraging employers to expand and hire.

Officials have indicated that they will soon start slowing bond purchases — something they could announce as early as November, based in part on progress in the labor market. The September jobs report likely won’t thwart those plans, which officials said are based on cumulative job gains rather than one-month data. The United States has restored more than 17 million jobs since the worst depths of the pandemic.

Yet Fed policymakers have repeatedly promised that even as they pull back from bond buying, they will continue to support the economy at low rates – their most traditional and most powerful tool – for as long as it needs their help. If rapid inflation looks set to survive and the job market takes too long to heal, they may find themselves forced to raise interest rates sooner in a job recovery than they would like.

“It’s not a situation that we’ve been in for too long, and it’s a situation where there is tension between our two goals,” Powell said during a recent public appearance. He later added, “Managing through this process over the next two years, I think, is the highest and most important priority, and it’s going to be very difficult.”

Central bank officials hope the jobs lost during the pandemic will soon return, but progress in recent months has stalled and started as the number of delta-related coronavirus infections surged, keeping diners away from restaurants and causing schools to close continuously. Employers added 194,000 jobs last month, which is disappointing compared to economists’ expectations, which would have required half a million jobs.

Average hourly wages rose 0.6 percent in September from the previous month, more than economists had expected in a Bloomberg survey, as there was a short supply of potential workers.

“For people worried about inflation, Delta has dealt us a blow – in terms of reducing the supply of labor and causing upward pressure on wage rates” and “at the same time, exacerbating bottlenecks,” Ms Coronado said.

inflation It came in at 4.3 percent In August, it is well above the central bank’s target, which is an average of 2 percent over time.

The huge price hike in 2021 was driven almost entirely by the pandemic’s quirks. Strong consumer demand for refrigerators and computers has overwhelmed supply chains at the same time that factory shutdowns due to the coronavirus have delayed production of parts. This combination led to a shortage of miscellaneous goods such as rental cars and washing machines, which drove up prices.

Officials still expect price pressures to be temporary. But it is becoming increasingly clear that while drivers are primarily one-time, they may stay for months. Shipping routes are struggling to catch up, the pandemic continues to force factory closures, and now a spike in raw commodity prices threatens to keep inflation high.

The Federal Reserve is watching closely to ensure that long-term inflation expectations remain at healthy levels. If consumers and investors expect inflation to rise, they may change their behavior, creating a self-fulfilling prophecy.

Some key metrics for consumer price expectations started moving above. Federal Reserve officials are also watching wage data, because when wages are rising rapidly and companies have to raise prices to cover their costs, it can start a cycle that locks in rapid inflation.

Today’s group raises an unhappy possibility: The Fed may find itself under pressure to raise interest rates and cool the economy before employment fully recovers.

“The report appears to leave Federal Reserve officials in an uncomfortable position,” Andrew Hunter, chief US economist at Capital Economics, wrote in a research note after the release.

There is not much the central bank can do to stimulate better port capacity or more apartments, but it can be argued that it can calm demand by raising interest rates. With fewer consumers buying apartments, sofas and garden furniture, factories, home builders, and freighters may catch up, helping ease cost pressures.

But higher rates would also slow business growth and employment, trapping the unemployed at the margins of the labor market. That’s why Mr. Powell and his colleagues advise patience, hoping to avoid overreacting to price hikes that will fade.

As of their latest economic forecast, the 18 policy makers at the Federal Reserve It was divided equallyHalf of them anticipate one or more interest rate increases by late next year, and the other half expect it to happen in 2023 or later. These dividing lines could harden in the future.

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