The Federal Reserve will face a more urgent fight to cool the US economy with sharp interest rate hikes after the latest batch of labor market data showed unexpected acceleration in job growth and strong wage growth.
The data released on Friday eased fears that the US economy is slowing sharply or is already in recession after two consecutive quarters of output decline this year. However, this will increase fears that high inflation may become stronger along with wage increases, which will require even greater intervention of the central bank.
The Fed has already raised the key interest rate from the lows of the coronavirus pandemic to a target range of 2.25%. up to 2.5 percent this year, including two more hikes of 0.75 percentage points in June and July.
Based on the latest employment report, economists and Fed observers say the likelihood of another aggressive upward move next month has increased, although the central bank will continue to closely scrutinize upcoming economic data, including next week’s inflation data.
“Today’s data should ease fears of recession but bolster fears that the Fed has much more to do, and now we believe a 75bp hike in September seems likely.” Inflation concerns that drive the Fed will only be compounded by this employment report, Michael Feroli, senior economist at JPMorgan wrote on Friday.
“The job has not slowed down in response to the tightening of the Federal Reserve. It’s a double-edged sword, “added Michael Gapen, chief US economist at Bank of America, noting that while the chance of a” short-term recession is less “,” the risk of a hard landing is increasing. ”
David Mericle, US chief economist at Goldman Sachs, said the report cleared some “ambiguities” about the strength of wage growth in the US economy, suggesting that it was not easing as much as the Fed might hope.
“The overall message is that wage growth is swaying at a pace that is arguably a few percentage points stronger than it would be in line with hitting 2 percent inflation,” which is the Fed’s long-held inflation target, he said. “The Fed has more to do than we thought before.”
Fed Chairman Jay Powell is expected to present his final thoughts on the US interest rate path and the central bank’s strategy to lower inflation at the annual conference in Jackson Hole, Wyoming, in late August.
In a recent press conference in July, Powell said that “another unusually large hike” in interest rates in September “may be appropriate,” but that decision was not made.
“It is one that we will create based on the data we will see. And we will make decisions meeting after meeting, ”he added.
Movements in the financial markets may also be a factor in the next Fed step. Traders began to price in expectations of higher interest rate hikes after employment data, predicting rates to peak in March at 3.64 percent, compared with 3.46 percent expected ahead of the report. Federal funds futures show that the odds of a 0.75 percentage point increase in September rose to 67 percent, up from 33 percent on Thursday.
While the large number of jobs puts pressure on the Fed, the Biden administration welcomed it as it means that a sharp economic downturn is less likely ahead of the November mid-term election.
It comes as Congress prepares to vote on a $ 700 billion package of measures to curb inflation by raising taxes for large corporations, lowering the cost of prescription drugs, and cutting the budget deficit – even if it would also increase spending on clean energy incentives to fight climate change.
“This law changes the rules of the game for working families and our economy. I can’t wait for the Senate to pass this bill and pass it as soon as possible, ”Biden said on Friday.