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HomeEconomy‘Goldilocks’ jobs report keeps Fed on track for series of rate rises

‘Goldilocks’ jobs report keeps Fed on track for series of rate rises


Another exceptionally strong US jobs report has kept the Federal Reserve on track to deliver a series of interest rate increases this year even as moderating wage growth mitigates the immediate need for aggressive tightening, according to economists.

Hiring accelerated more than expected in February as the world’s largest economy added 678,000 jobs, the most since July, pulling the unemployment rate down to 3.8 per cent.

A bigger surprise was the lack of wage growth. Average hourly earnings flatlined last month, following a 0.6 per cent jump in January, but were up 5.1 per cent over the past 12 months.

And the job gains were widespread with strong increases in leisure and hospitality, healthcare, professional and business services, retail and construction.

“This is the Goldilocks employment report for the Fed and for the economy, because now we have a situation where growth is stronger than expected, and [wage] inflation is better than expected,” said Torsten Slok, chief economist at Apollo Global Management.

He added: “It definitely takes some of the pressure off the Fed in terms of rate hikes.”

Line chart of Average hourly earnings month-on-month growth (%) showing US wages little changed in February as more Americans returned to the workforce

“The wage data we got is good news for the Fed, but that doesn’t negate the fact that we should still be closer to neutral,” said Tiffany Wilding, US economist at Pimco, referring to the level of policy rates that neither supports nor constrains economic activity.

The increase in the labour force participation rate to 62.3 per cent, the highest since March 2020, was also welcomed by economists given that labour supply growth has lagged demand for much of the pandemic.

US president Joe Biden seized on the report to tout the labour market recovery during his presidency.

“Since I took office, the economy has created 7.4mn jobs. That’s 7.4mn jobs providing families with dignity and a little more breathing room. We are building a better America,” he said.

The combination of strong hiring, easing wage pressures and improving participation is exactly the kind of jobs report people should hope to see in the months ahead, said Eric Winograd, senior economist for fixed income at AllianceBernstein.

“The strength of the labour market is attracting people back in,” he said. “If you think about what is bringing in people off the sidelines, it is wage gains and improved public health.”

US businesses have offered heftier wages and improved benefits to attract workers in a labour market with 10.9mn vacant positions. Along with near-record turnover, that has helped create an “overheated” labour market that does not need the emergency support measures put in place at the start of the pandemic, according to Jay Powell, Fed chair.

Powell said this week in testimony to US lawmakers that he supports a quarter-point interest rate increase this month as the first step in a “series” of adjustments in 2022, with the Fed potentially considering raising rates by larger increments at one or more meetings if inflation remains elevated.

He said labour market strength alongside very elevated inflation justifies the US central bank proceeding with its plan to raise rates this month, despite the prospects of slower growth stemming from Russia’s invasion of Ukraine.

“Commodity prices have moved up significantly, energy prices in particular. That’s going to work its way through our US economy,” Powell told members of the Senate banking committee on Thursday. “We’re going to see upward pressure on inflation, at least for awhile. We don’t know how long that will be sustained for.”

Markets are pricing in at least five interest rate increases this year, down from six before Russia’s invasion of Ukraine.

Shorter-dated US Treasury yields, which move with interest rate expectations, fell slightly on Friday following the jobs report, as traders bet that stalled wages would keep the Fed on track for a quarter-point increase in rates later this month.

Vincent Reinhart, who worked at the US central bank for more than 20 years, expects the Fed to proceed “gradually” this year in light of geopolitical uncertainties and the dovish composition of the its monetary policy setting committee. He also worries that will amount to a policy error.

“They’re not going to be able to tighten enough in 2022,” he predicted. “They’ll have to go a bit more in 2023 and inflation is going to be well above their goal this year and next.”

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