The Fed’s path to a ‘Goldilocks’ economy just gets a little more complicated

A ‘Help Wanted’ sign is displayed in a store window in Manhattan on December 02, 2022 in New York City.

Spencer Platt | Getty Images

As far as the jobs report goes, November wasn’t exactly what the Federal Reserve was looking for.

The higher-than-expected payrolls number and hot wage readings, which were double Wall Street’s forecast, only have the Fed walking a delicate rope to navigate.

In normal times, a strong jobs market and rising employee wages would be considered a highly rated problem. But as the central bank seeks to curb persistent and troubling inflation, it’s a very good thing.

In line with most of Wall Street Friday, Jefferies chief financial economist Anita Markowska wrote in a post-nonfirm payrolls analysis, “The Fed may risk taking its foot off the gas at this point in fear that inflation expectations will rebound. ” “Wages growth remains in line with inflation near 4%, and shows how much more work the Fed needs to do.”

payment register increased by 263,000 in November, Far ahead of the 200,000 Dow Jones estimate. Wages rose 0.6% in the month, more than double the forecast, while 12-month average hourly earnings rose 5.1%, above the 4.6% forecast.

All those things together add up to a similar recipe for the Fed – Interest rate hike continuesEven if they are slightly smaller than the three-quarters of a percentage point per meeting run by the central bank since June.

Little impact from policy steps

The numbers indicate that the 3.75 percentage point rate hike has had little impact on labor market conditions so far.

“We’re not really seeing the impact of Fed policy on the labor market yet,” said Elizabeth Crowfoot, senior economist at Labor Market Lightcast, and it’s concerning whether the Fed will see job growth as a focus of its efforts. Looking at it as a leading indicator.” Analytics Firm.

Most Street analysis following the report was viewed through the prism of the Fed chairman’s comments Jerome Powell Made Wednesday. The head of the central bank outlined a set of parameters he was looking at for clues on when inflation would ease.

These included supply chain issues, housing development and labor costs, particularly wages. He has also been known to warn on some issues, such as his focus on services inflation minus housing, which he thinks will come back on its own next year.

Powell said, “The labor market, which is particularly critical to inflation in housing ex-core services, shows only tentative signs of rebalancing, and wage growth remains above a level consistent with 2 percent inflation over time.” Will be.” “Despite some promising developments, we have a long way to go to restore price stability.”

one in Speech at the Brookings Institution, he said he expected the Fed to cut the size of its rate hike — part that was heard as the basis of the market for Powell’s post-rally rally. He said the Fed would likely have to take rates higher than before and leave them there for an extended period, which was part of the market neglecting.

“The November jobs report … is exactly what Chair Powell told us earlier this week,” said Joseph Lavorgna, chief US economist at SMBC Nikko Securities. “Wages are rising more than productivity, as the labor supply continues to shrink. To restore labor demand and supply, monetary policy needs to be more restrictive and remain in place for an extended period.”

The Way to ‘Goldilocks’

To be sure, all is not lost.

Powell said he still sees a path to a “soft landing” for the economy. This outcome probably looks as though there is either no recession or just a shallow one, yet an extended period of downward trend growth and at least some upward pressure on unemployment.

However, getting there will require an almost perfect storm of circumstances: a reduction in labor demand without mass layoffs, a continued easing of supply chain constraints, an end to hostilities in Ukraine, and housing costs, especially rents above. reversal of trend.

From a net labor market perspective, this would mean a decline of perhaps 175,000 new jobs a month – the 2022 average is 392,000 – with annual wage gains in the 3.5% range.

There are some signs that the labor market is cooling off. The Labor Department’s household survey, which is used to calculate the unemployment rate, showed a drop of 138,000 in those saying they were working. Some economists believe the household survey and the establishments survey, which counts jobs rather than workers, may soon converge and show a more muted employment picture.

“The biggest disappointment was the strong wage growth numbers,” Mark Zandi, chief economist at Moody’s Analytics, said in an interview. “We’re at 5% since the beginning of the year. We’re not going anywhere fast, and it needs to come down. That’s what we need to worry about the most.”

Still, Zandi said he doubts Powell was too bothered by Friday’s numbers.

“The inflation outlook, while uncertain at best, has a path forward that is consistent with a Goldilocks scenario,” Zandi said. “263,000 vs 200,000 – that’s not a meaningful difference.”