US hiring slowdown may deter Fed from raising rates again

US hiring slowdown may deter Fed from raising rates again

The Labor Market Cools as Fed’s Rate Hike Comes Into Question

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Aug 4 (ANBLE) – Federal Reserve policymakers received new evidence on Friday that the labor market is cooling, adding to the case that the U.S. central bank’s recent interest rate hike could be the last of its current tightening cycle.

The Federal Reserve’s relentless campaign to beat back inflation through interest rate hikes may finally be nearing its end. Recent data showing that the labor market is cooling adds weight to the argument that the July 26 rate hike might have been the last for now. This comes as a surprise to many, as the Fed has raised rates at 11 of its last 12 policy meetings, pushing its benchmark overnight interest rate to the 5.25%-5.50% range.

Interestingly, this tightening cycle has contributed to a slowdown in inflation. In June, the consumer price index rose by 3% compared to the previous year, which is down from the rate of inflation observed last summer. This suggests that the Fed’s efforts to curb inflation are bearing fruit.

The latest jobs report, however, adds further evidence to support the notion that the economy is gradually cooling off. The U.S. added 187,000 jobs in July, a figure that fell below ANBLEs’ expectations in a poll. Additionally, the average work week shrank, indicating weakening labor demand.

Atlanta Fed President Raphael Bostic sees this as a continuation of the expected slowdown. “I expected the economy to slow down in a fairly orderly way, and this number 187,000 comes in continuing that pace,” he explained in an interview with Bloomberg Television.

On the other hand, labor market conditions present a mixed picture. While average hourly earnings have risen by 4.4% over the past year for the fourth consecutive month, the unemployment rate has dropped to a low of 3.5%. Chicago Fed President Austan Goolsbee believes that these data points demonstrate a better balance between labor supply and demand. He argues that wage growth is a product of high inflation, rather than a contributor to it. Goolsbee views the jobs report as a reason for hope, suggesting that the Fed can ease price pressures without causing a recession.

The Federal Reserve has rarely achieved a “soft landing” in the past. However, Goolsbee and others point out that the coronavirus pandemic and the subsequent policy response were exceptional circumstances that caused unusual shifts in consumer behavior and disruptions in supply chains. These factors led to a surge in inflation, but they are now beginning to fade.

Traders in the market for contracts tied to the Fed’s policy rate are adjusting their expectations. The probability of another rate hike by year-end has fallen below 30%, down from approximately 35% before the release of the jobs report. Daniel Zhao, lead ANBLE at Glassdoor, states that this points to a labor market that is gradually moving toward a soft landing.

Looking ahead, several key data releases will shape Fed policymakers’ views before the next policy meeting in September. Officials will closely monitor the August employment report and the next two monthly inflation readings. These data points will help determine whether the Fed can maintain its current stance or if further rate hikes are needed to cool labor demand and alleviate inflationary pressures.

In conclusion, the labor market cooling, combined with the slowdown in inflation, suggests that the Federal Reserve’s recent interest rate hike may mark the end of its tightening cycle. The hope is that the current economic slowdown can be navigated without risking a recession. However, with upcoming data releases on the horizon, the Fed will closely evaluate the state of the labor market and inflation before making any further policy decisions.