Fed officials worry about job market as they prepare for Jackson Hole By Reuters

Written by Howard Schneider

WASHINGTON (Reuters) – Federal Reserve staff gathered at the central bank’s annual meeting in Jackson Hole, Wyoming, this week can be pleased that the US unemployment rate, at 4.3%, remains low. according to historical standards.

But it usually is: The US unemployment experience since the late 1940s has included an unemployment rate that is often below the long-term average of 5.7%, until it rises rapidly and even more so, the surprise that Fed officials are worried about. repeatedly.

The resulting pattern is not entirely clear.

The steady increase in the unemployment rate from 3.7% in January 2023 to 4.3% from July 2024 is also accompanied by an increase of 1.2 million in the number of people looking for work – something that is generally considered to be and a good sign for the economy but that could cause the unemployment rate to rise.

However, in recent days, Fed officials have been more clear that the weakening labor market has made them ready to cut interest rates after keeping the US central bank’s policy rate at 5.25 % -5.50% over a year. The current level is the highest in a quarter of a century.

“The balance of risks has shifted, so the debate about cutting rates in September is a good one to have,” Minneapolis Fed President Neel Kashkari said in a recent Wall Street Journal interview, referring to the central bank’s Sept. 17-18. meeting.

Other Fed officials including San Francisco Fed President Mary Daly said in other interviews that they are getting more confident that inflation is returning to the central bank’s 2% target and that they are open to cutting rates.

The Fed is widely expected to cut its policy rate by a quarter of a percentage point next month. In addition, policymakers will release updated projections showing how they believe rates and the economy could change throughout this year through 2025.

Fed Chairman Jerome Powell is expected to continue to play down sentiment that the central bank is about to begin tapering after managing the worst jump in inflation in 40 years. speak Friday at the Kansas City Fed’s Jackson Hole meeting.

EYES ANOTHER HELP

Fed policymakers hope these cuts will come in time to end what has so far been described as a “soft landing” where inflation falls without the kind of sharp rate hikes. of unemployment which often accompanies the central bank’s efforts to reduce the rate of inflation. by stifling the economy with high interest rates. In past recessions, once the unemployment rate started to rise, it continued to rise.

On the other hand, the progress made on inflation in the current period has been impressive. The consumer price index, tracked by the Fed for its 2% inflation target, peaked at 7.1% in June 2022, and was running at 2.5% as of July – to achieve that goal.

Yet the unemployment rate has until recently been steady, remaining below 4% for two years running, while wage growth has been above average. seen in the decade before the COVID-19 pandemic.

This trend has begun to change this year, and Fed officials have given increasing weight to the risks they think they run by keeping monetary policy too tight for too long.

The latest labor market data shows why they are worried.

The US government reported weaker-than-expected job growth in July, with employers adding just 114,000 positions. The July figure pulled the average three months below the pre-pandemic norm, and pushed the unemployment rate up to 4.3%.

In addition, some of the ways in which information changes from month to month, as people enter and leave a job or look for a job, are not encouraging. While the number of workers is increasing online, a positive change, it also seems to be taking longer for people to find jobs – as shown by the increasing number of people joining the military but they move on to the crisis of unemployment rather than directly. to enter the workforce.

In addition, federal labor movement data shows an increasing number of people each month moving from employment to unemployment.

Yet at the same time unemployment claims have not started to rise dramatically, and are actually keeping pace with labor force growth.

Amid strong consumer spending and economic growth that may be slowing but still healthy, the Fed is not ready to consider the labor market in trouble – it just wants to avoid it creates.

In comments to the Financial Times published on Sunday, Daly said that keeping rates high when inflation was falling was “a recipe for getting the result we don’t want, which is price stability and the labor market unstable and weak.”

A similar sentiment was echoed by Chicago Fed President Austan Goolsbee, who told the CBS program “Face the Nation” on Sunday: “If you stay tight for too long, you’re going to have a problem on the job side. of the Fed’s order.”