Big US job gains give Fed ‘much more work to do’ to control inflation

The Federal Reserve will face increased urgency in its fight to cool down the US economy with steep interest rate hikes after the latest batch of labor market data showed an unexpected acceleration in job creation and strong wage growth.

The figures released on Friday eased concerns that the US economy was slowing sharply or was already in recession after two straight quarters of output contraction this year. However, concerns will grow that high inflation will take hold as wages continue to rise, requiring even more central bank intervention.

The Fed has already raised its main interest rate from the lowest levels of the coronavirus pandemic to a target range of 2.25% to 2.5% this year, including two consecutive increases of 0.75 percentage points in June and July. .

In the wake of the latest jobs report, economists and Fed watchers say the likelihood of another aggressive move next month has increased, though the central bank will continue to closely scrutinize upcoming economic data, including inflation figures will be published next week.

“Today’s numbers should calm recession fears but amplify concerns that the Fed has a lot more work to do, and we now think a 75 basis point hike in September is likely. Inflation concerns driving the Fed will only be accentuated by this jobs report,” Michael Feroli, senior economist at JPMorgan, wrote in a note on Friday.

“Jobs have not slowed down at all in response to the Federal Reserve tightening. This is a double-edged sword,” added Michael Gapen, chief US economist at Bank of America, noting that while the chance of a “near-term recession is smaller,” the “risk of a forced landing is increasing.”

David Mericle, chief US economist at Goldman Sachs, said the report cleared up some “ambiguity” about the strength of wage growth in the US economy and suggested it was not slowing as much as the Fed expected. .

“The overall message is that wage growth is drifting at a pace that is probably a couple of percentage points stronger than would be consistent with achieving 2 percent inflation,” which is the long-term inflation target. data from the Fed, he said. “The Federal Reserve has even more way to go than we thought before today.”

Fed Chairman Jay Powell is expected to deliver his latest thoughts on the path of US interest rates and the central bank’s strategy to curb inflation at the annual conference in Jackson Hole, Wyoming, scheduled for late Thursday. of August.

During his last news conference in July, Powell said “another unusually large increase” in interest rates in September “might be appropriate” but that decision had not been made.

“It is one that we will do based on the data that we see. And we are going to be making decisions meeting by meeting,” she added.

Financial market moves may also be a factor in the Fed’s next move. Traders began pricing in expectations of further interest rate hikes after the jobs data, predicting rates will peak in March 3.64 percent, compared to 3.46 percent expected before the report. Fed funds futures show the chances of a 0.75 percentage point increase in September have risen to 67 percent, up from 33 percent on Thursday.

While the strong jobs number adds to the pressure on the Fed, the Biden administration welcomed it as it means a sharp economic downturn is less likely before the November midterm elections.

It comes as Congress prepares to vote on a $700 billion package of measures designed to curb inflation by raising taxes on large corporations, lowering the cost of prescription drugs and reducing the budget deficit, though it would also increase the spending on clean energy incentives. in order to combat climate change.

“This bill is a game changer for working families and our economy. I hope the Senate will adopt this legislation and pass it as soon as possible,” Biden said Friday.

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