Fed officials spent much of 2022 and 2023 worrying that the job market was too strong to sustain. The logic is that employers are scrambling to find a limited pool of workers, which causes wages to rise quickly, ultimately forcing companies to raise prices to cover labor costs.
But the Fed has recently accepted rapid job growth rather than viewing it as a potential inflation problem.
This is because the supply of labor is increasing markedly due to strong employment conditions. Immigration is much stronger than expected, with millennial men and women in particular trickling into the workforce, allowing companies to recruit employees without having to compete too hard. Wage growth has been strong, but not at a rapid pace, and inflation has slowed across a wide range of purchasing items, including in the generally labor cost-sensitive services sector.
Data released Friday showed that many of these trends remain in place. Employment was very strong in March, with wages rising steadily, but the trend continued to be somewhat gradual on an annual basis. Last month's average hourly wage increased by 4.1% compared to the previous year, but decreased slightly from February's 4.3%.
Although the overall labor force participation rate has rebounded slightly, meaning a larger proportion of adults are working or looking for work, employment of foreign-born workers continues to increase and this suggests that immigration may account for some of the solid employment growth.
The question is how long policymakers will continue to tolerate such strong hiring without worrying about triggering a rebound in consumer demand, economic growth and inflation. The pace of job growth seen in March is faster than most economists consider sustainable, even after accounting for increases in labor supply.
But in recent speeches, central bankers mainly expressed reassurance about the active labor market.
Federal Reserve Chairman Jerome H. Powell said in a speech this week that the job market is “solid but rebalancing.” He noted that the number of job openings has fallen and that employers report in surveys that it has become easier to hire.
A balanced but robust job market is good news for the Fed. If businesses manage to find workers to hire, it means the economy can grow at a steady pace without overheating and causing significant inflation. And that means even if the Fed doesn't hit the brakes, it can squeeze the economy a little by raising interest rates, which is what the Fed is doing to keep inflation in check.
In fact, the recent surprising surge in labor supply is a big reason why central banks may be able to achieve a “soft landing,” a gradual decline in the labor market without triggering a painful recession. Powell said this week that immigration was a big reason economic growth last year exceeded forecasters' expectations without causing inflation.
In fact, inflation slowed from 6.4% at the beginning of the year to 3.3% at the end of the year, even though consumer spending consistently exceeded expectations.
“Our economy has always been, and probably still is, in a labor shortage,” Powell said, but “immigration is an answer to what we've been asking ourselves: 'Are we in a situation where almost all workers are in short supply?' “And how was the economy able to grow by more than 3% in one year?” Did an outside economist predict a recession? ”
Still, the current pace of job growth is strong even with rapid immigration, and Fed officials may remain wary that the economy still risks overheating if hiring continues at this pace.
Economists believe that increased immigration will increase the supply of labor, allowing job growth to remain strong without overheating the economy. A recent analysis from the Brookings Institution estimates that employers could add 160,000 to 200,000 jobs per month this year without taking on the big risks of soaring wages or rising inflation. Without all the immigration, it would have been from 60,000 to closer to 100,000.
And some Fed officials are already questioning whether the central bank should cut rates at a time when inflation is stubborn and the economy appears to be heating up again.
Fed policymakers have signaled in recent months that they may soon lower borrowing costs, which are currently set at about 5.3%. But with inflation reaching breaking point after months of slowing, investors have been steadily pushing back their expectations of when that will happen, and now expect the first move to be as early as June or July. Expect.
Minneapolis Fed President Neel Kashkari even suggested this week that it might make sense to keep interest rates at their current high levels for the rest of the year if price increases stall. Mr. Kashkari does not vote on 2024 policy, but he sits around the discussion table during rate-setting meetings.
In an interview with Pensions and Investments, Kashkari said, “If inflation continues to be flat, it will raise questions about whether there is a need to cut interest rates at all.'' “There is,” he pointed out. ”