Big US job gains give the Fed “a lot of work to do” to tame inflation

The Federal Reserve will face more urgency in its fight to cool the US economy with sharp interest rate hikes after the latest batch of labor market data showed an unexpected acceleration in job gains and robust wage growth.

Friday’s figures eased fears that the US economy was slowing sharply or already in recession after two consecutive quarters of contraction in production this year. However, it will heighten fears that high inflation may become entrenched as wages continue to rise, requiring further intervention by the central bank.

The Fed has already raised its key interest rate from the coronavirus pandemic trough levels to its target range of 2.25 percent to 2.5 percent this year, including two back-to-back 0.75 percentage point increases in June and July.

On the back of the latest jobs report, economists and Fed watchers say the likelihood of another violent upward move next month has risen, although the central bank will continue to closely examine upcoming economic data, including inflation figures due next week.

“Today’s numbers should calm recession fears but amplify fears that the Fed has a lot of work to do, and we now believe a 75 basis point hike in September looks likely,” Michael Feroli, chief economist at JPMorgan, wrote in a note on Friday. Inflation fears motivating the Fed will only be heightened by this jobs report.

Jobs haven’t slowed at all in response to the Fed’s tightening. “This is a double-edged sword,” added Michael Gaben, chief US economist at Bank of America, noting that while the chance of a “near-term recession is lower,” “the risk of a hard landing is rising.”

David Merkley, chief US economist at Goldman Sachs, said the report cleared some “ambiguities” about the strength of wage growth in the US economy, suggesting it was not easing as much as the Fed might hope.

“The general message is that wage growth is going sideways at a rate that is probably two percentage points stronger than what would be consistent with achieving 2 percent inflation,” he said, the Fed’s longstanding inflation target. “The Fed has to go further than we thought before today.”

Federal Reserve Chairman Jay Powell is expected to lay out his final thoughts on the path of US interest rates and the central bank’s strategy to reduce inflation at Wyoming’s annual Jackson Hole conference scheduled for late August.

During his last press conference in July, Powell said that “another unusually large increase” in interest rates in September “might be appropriate” but that no decision was made.

“It is a method that we will make based on the data we see. And we will make decisions through the meeting.”

Financial market moves may also be a factor in the Fed’s next move. Traders began pricing expectations of higher interest rates after the jobs data, predicting rates would peak in March at 3.64 percent, compared to the 3.46 percent expected before the report. Federal Reserve fund futures show that the chances of a 0.75 percentage point increase in September rose to 67 percent, from 33 percent on Thursday.

While the strong job numbers add to the pressure on the Fed, they have been welcomed by the Biden administration, as they mean a sharp economic downturn is less likely ahead of the November midterm elections.

It comes as Congress prepares to vote on a $700 billion package of measures designed to curb inflation by raising taxes on large corporations, lowering the cost of prescription drugs and slashing the budget deficit — although it would also boost spending on clean energy incentives. in order to combat climate change.

“This bill is a game changer for working families and our economy. I look forward to the Senate adopting and approving this legislation as soon as possible,” Biden said on Friday.

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