Big job gains in the US give the Fed “a lot more work to do” to tame inflation

The Federal Reserve will need to address its struggle to cool the US economy with sharp increases in interest rates more urgently after the latest batch of labor market data showed an unexpected acceleration in job growth and strong wage growth.

The figures released Friday eased fears that the US economy was slowing dramatically or was already in recession after two consecutive quarters of contraction in production this year. However, concerns will increase that high inflation may take root as wages continue to rise, requiring even more central bank intervention.

The Fed has already shifted its prime interest rate from coronavirus pandemic lows to a target range of 2.25% to 2.5% this year, including two consecutive 0.75 percentage point hikes in June. and July.

In the wake of the latest employment report, Fed economists and observers say the likelihood of another aggressive upward move next month has increased, although the central bank will still closely scrutinize upcoming economic data, including data. on inflation coming next week.

“Today’s numbers should ease recession fears, but amplify fears that the Fed has a lot more work to do, and we now think a 75 basis point hike in September is likely. The inflation concerns motivating the Fed will only increase from this employment report, ”Michael Feroli, a senior economist at JPMorgan, wrote in a statement on Friday.

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

David Mericle, Goldman Sachs chief US economist, said the report cleared up some “ambiguities” about the strength of wage growth in the US economy, suggesting it would not be easing as much as the Fed might hope.

“The overall message is that wage growth is going sideways at a rate that is probably a couple of percentage points stronger than what would be compatible with reaching 2% inflation,” which is the long-term inflation target. Fed date, he said. “The Fed has even more to do 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 reduce inflation at the annual conference in Jackson Hole, Wyoming, scheduled for late August.

During his last press conference in July, Powell said “another unusually large” interest rate hike in September “might be appropriate,” but that decision was not made.

“It is one that we will build based on the data we see. And we will make decisions meeting by meeting, ”she added.

Movements in financial markets may also be a factor in the Fed’s next step. Traders have begun to gauge expectations of higher interest rate hikes following the employment data, expecting rates to peak in March at 3. , 64%, compared to 3.46% predicted before the report. Federal funds futures show that the chances of a 0.75 percentage point hike in September rose to 67%, up from 33% on Thursday.

Although the strong number of jobs adds to the pressure on the Fed, it has been welcomed by the Biden administration, as it means a severe economic downturn is less likely ahead of November’s mid-term 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, reducing the cost of prescription drugs and lowering the budget deficit, though it would also increase spending. for clean energy incentives to combat climate change.

“This bill is a game changer for working families and our economy. I can’t wait for the Senate to adopt this legislation and pass it as soon as possible, “Biden said on Friday.