Robust American labor market and less wage pressure

Washington/Berlin, January 6 – Despite the series of interest rate hikes in the US, the labor market remains in good shape. Employment growth in December even exceeded expectations: 223,000 new jobs were created outside agriculture after 256,000 in November, the government in Washington announced on Friday. Economists polled by Reuters had just 200,000 new jobs on the list. The separately surveyed unemployment also came as a surprise. It fell to 3.5 percent from 3.6 percent in November. At the same time, wage pressures eased, fueling speculation in futures markets that the Federal Reserve may further slow its pace of rate hikes in early February.

That prospect eased interest rate concerns on Wall Street. “The Fed will continue to raise interest rates, but apparently at a less aggressive pace,” Spartan Capital Securities economist Peter Cardillo said.

Atlanta Fed District Chief Raphael Bostic said the jobs data did not change his economic outlook. The economy is gradually cooling down. At the same time, inflation is still too high: “We have to stay the course,” he emphasized on the CNBC television channel.

The central bank will curb the high inflation in the country of 7.1 percent recently and at the same time cool down the overheated labor market with higher interest rates. It raised the key interest rate by half a percentage point in December – to the new range of 4.25 to 4.50 percent. Previously, it had made even bigger increases four times in a row – by 0.75 percentage points each time. The monetary watchdogs now see significant progress in curbing high inflation and want to steer a less aggressive course in the future.

After the labor market data, speculation rose in futures markets that interest rates could only be raised by a quarter of a percentage point in February. Bostic said he would be comfortable with both such a small step and a half-percentage-point increase at the February meeting.

WAGES IN FOCUS

According to US currency watchdog James Bullard, a continued robust labor market increases the chances of a “soft landing” in the US economy despite the interest rate hike – that is, an economic downturn can be avoided. In light of the rosy outlook on the labor market in 2023, the central bank can concentrate on fighting inflation. As the economy cools, inflation will also cool, St. Louis Fed District Governor.

The central bank also looks at the development in hourly wages, which increased by 4.6 percent in December compared to the previous year. Experts had expected a value of 5.0 percent here, after 4.8 percent in November: “As wage pressures appear to be easing, interest rate expectations are unlikely to be pushed,” says Helaba economist Ulrich Wortberg. In the view of most US monetary authorities, “flexibility and freedom of choice” are required for the further course of monetary policy – presumably a sign that the central bank will continue to take its foot off the gas.

Economic indicators now also signal that the economy is no longer running smoothly: the business of American service providers shrank for the first time in over two and a half years. The PMI fell to 49.6 in December from 56.5 in October, according to the latest ISM survey. Experts polled by Reuters had only expected a drop to 55.0 points, which would have left the barometer well above the 50-point growth threshold. US manufacturing is already on the way back and accelerated its decline in December. In addition, it had a large drop in orders in November. Orders fell 1.8 percent compared to the previous month.

Robust American labor market and less wage pressure – the central bank may step back

Source: Reuters

Symbolic photo: Image by Antranik Manukyan on Pixabay

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