The Federal Reserve spent much of 2022 and 2023 focusing narrowly on inflation while policymakers set interest rates: prices rose far too quickly, making them the central bank's top priority. But now that inflation has cooled, officials are again more clearly incorporating the labor market into their decisions.
A possible challenge? It is very difficult to assess exactly what the monthly labor market data is telling us.
Jerome H. Powell, the Fed chairman, said during a news conference on Wednesday that how the labor market performs in the coming months could help determine whether and when the central bank will raise interest rates lowered this year. A significant slowdown could prompt policymakers to make cuts, he suggested. On the other hand, if job growth continues quickly and inflation stagnates, that combination could discourage the Fed from cutting interest rates any time soon.
But it's hard to guess which of these scenarios will play out — and it's harder than usual to determine how hot today's job market is, especially in real time. Fed officials will get the latest numbers on Friday morning when the Labor Department releases its April employment report.
Hiring numbers have increased rapidly in recent months. That would typically unsettle economists that the economy is on the verge of overheating: Companies would risk competing for the same workers and driving up wages in a way that could ultimately drive up prices.
But this hiring boom is different. The wave of immigrants and workers coming from the margins of the labor market has helped to significantly increase the pool of applicants. This has allowed companies to hire new employees without depleting the labor pool.
But the increase in available labor has also meant that a primary measure that economists use to assess the strength of the labor market – wage growth – is no longer providing a clear signal. Therefore, economists need to rely on other indicators to assess the strength of the labor market and predict its further dynamics. And these measures convey different messages.
Wage growth is still very strong by some measures, but appears to be slowing by others. The number of job openings has declined, the unemployment rate has increased recently (particularly among Black workers), and hiring expectations in company surveys have fluctuated.
The conclusion is that this appears to be a strong labor market, but exactly how strong is difficult to say. It is even more difficult to estimate how much momentum there will be in the coming months. If job growth slows, would that be a sign that the economy is faltering or just evidence that employers have finally met their demand for new hires? If job gains remained strong, would that be a sign that overheating was occurring or evidence that labor supply was still increasing?
“From a pre-pandemic perspective, the economy looks pretty strong, maybe even hot,” said Ernie Tedeschi, a research scholar at Yale Law School who was a White House economic adviser until this spring. But given all the improvements in labor supply, “perhaps we shouldn't be thinking about the economy now from a pre-pandemic perspective,” he said.
Friday's report is expected to show that job gains remained rapid in April, with economists forecasting a 240,000-person jump in employment, according to a Bloomberg survey.
This would continue the trend of last year. From March 2023 to March 2024, the economy added an average of 247,000 jobs per month. To put that in context, the economy added 167,000 jobs per month in the year ending March 2019, the spring before the coronavirus pandemic hit.
The Fed's policy committee voted this week to keep interest rates at 5.3 percent, where they have been set since July. Mr. Powell suggested they are likely to remain at these relatively high levels for longer than previously expected, as officials wait for evidence that inflation will cool even further after months of stalled progress.
But while future price rises will be the main driver of policy, Mr Powell said that “with inflation now down to below 3 per cent”, employment is also “now coming back into focus”.
For now, Fed officials aren't too concerned about the rapid job growth. Mr. Powell noted on Wednesday that part of the reason the economy was able to grow more strongly in 2023 was because the labor supply had increased so much, both because of immigration and because more people were participating in the labor market.
“Remember what we saw last year: very strong growth, a really tight labor market and a historically rapid decline in inflation,” Powell said. “I wouldn’t rule out the possibility that something like this could continue.”
On the other hand, Mr. Powell indicated that Fed officials would keep an eye on wage growth. He repeatedly pointed out that strong wage increases alone would not be enough to drive the Fed's decisions.
However, the Fed chair still signaled that recent wage increases were stronger than the Fed thought would be consistent with long-term low and stable inflation. As companies pay more to attract workers, many economists say they are likely to raise prices to cover rising labor costs and protect profit margins.
Salary gains continue to be strong across key measures. Data this week showed that a closely watched measure of wages and benefits by the Fed, the so-called employment cost index, rose faster than expected at the start of 2024.
“We are not looking for wage increases, but in the longer term there will be inflationary pressures if wage increases are higher than productivity would justify,” Powell said this week. When it comes to slowing wage increases to a sustainable pace, “we have ways to make that happen.”
It is unclear whether employment and wage growth will continue to be so rapid.
Bill Kasko, the president of a white-collar employment agency in Texas, said that while he continues to see strong demand for workers, he has also noticed that employers have become more selective as the interest rate outlook and the upcoming presidential election fuel uncertainty. They wanted to see more applicants and take longer to make decisions.
“There is still demand, but it is not moving as quickly,” Mr. Kasko said.
If employers begin to pull back in a more concerted manner, Mr Powell made clear this week that a “significant” rise in unemployment could prompt the central bank to lower interest rates.
The result? It appears officials are more worried about a significant slowdown in the job market than about strong sustained wage gains, especially when it's hard to tell whether solid hiring numbers indicate the job market is hot or simply changing.
“There is an asymmetry in their view of the labor market,” said Michael Feroli, chief U.S. economist at JP Morgan.
Ben Casselman contributed reporting.