Falling Unemployment and Rising Wages Add Pressure to the Fed

January 7, 2022

Job creation slowed in December, but a declining unemployment rate and robust wage growth suggest strong economic growth in the coming year and are likely to help spur the Federal Reserve to maintain an aggressive stance.

Employers added 199,000 jobs in December, according to the Labor Department. That is less than half of what many economists had forecast and below the monthly average job growth of 537,000 seen in 2021. The U.S. economy added 6.4 million jobs in 2021, but there are still 3.6 million fewer jobs than before the pandemic.

Despite the slowdown in hiring, the unemployment rate dropped to 3.9% and wage growth accelerated, with wages climbing 4.7% higher than a year prior. The labor participation rate remained unchanged and well below pre-pandemic levels, as millions of workers who left the workforce during the pandemic remain on the sidelines.

A declining unemployment rate and fast wage growth, coupled with surging inflation, may spur the Fed to accelerate the tightening of monetary policy. Fed officials noted at their December meeting that interest rate increases could come “sooner or at a faster pace” than anticipated if economic conditions warranted it, and many investors are betting that we could see a rate increase as soon as March.

December’s jobs report was based largely on data from the middle of the month, so any impact that the Omicron variant is having on the labor market will not be reflected until the January report.

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