July’s Strong Jobs Numbers Put Additional Pressure on the Fed

August 5, 2022

While there are many signs that the economy is losing steam, the labor market continues to be red hot, with July’s job numbers far exceeding expectations.

The U.S. economy added 528,000 jobs last month, more than double the 258,000 that Dow Jones economists had been anticipating. The unemployment rate ticked down to 3.5%, the same level it was just before the pandemic began and tied for the lowest since 1969.

The Bureau of Labor Statistics notes that private sector payrolls are now higher than they were in February 2020, meaning that the private sector has now regained all the jobs lost during the pandemic, though government payrolls are still lagging.

While this is good news for the economy, it makes it more likely that the Federal Reserve will maintain its current aggressive stance. After the Fed raised rates by 0.75 percentage points in June–the largest increase since 1994–and then again in July, traders had been anticipating a slowdown in rate increases. Many Fed officials have suggested in recent weeks that we may see a smaller 0.5 percentage point increase at the Fed’s September meeting.

Doing so would depend on a slowdown in economic activity, however, and following the latest jobs numbers, traders are now expecting another 0.75 percentage point increase.

Of particular importance for the Fed is July’s robust wage growth. Average hourly earnings increased 0.5% from June and 5.2% from a year ago. Wage growth in June was also revised higher, suggesting that earlier data overstated the magnitude of a recent deceleration in the brisk pace of wage growth.

There are concerns that we may be seeing a wage-price spiral, where workers demand higher pay to keep pace with inflation and employers pass their higher labor costs onto consumers, further driving up inflation.

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