Federal Reserve officials have spent much of 2022 and 2023 worrying that the job market is too strong to be sustainable. Employers are racing to take on a limited supply of workers, the logic goes, leading to rapid wage gains that will eventually prompt those firms to raise prices to cover the their labor costs.
But rather than viewing rapid job gains as a potential inflationary problem, the Fed has recently embraced them.
That’s because strong hiring has accompanied a marked pickup in labor supply. Immigration has been stronger than expected, and millennial men and women in particular entering the labor force, which allows companies to hire without having to compete too fiercely for employees. Wage growth has been strong but not gangbusters, and inflation has cooled across purchases, including those in service categories that are typically sensitive to labor costs.
Data released Friday showed many of those trends are continuing. Hiring was very strong in March, and that wages rose at a solid clip but continued to decline on an annual basis. Average hourly earnings climbed 4.1 percent last month from a year earlier, down one tick from 4.3 percent in February.
General labor force participation partially taken, meaning a larger share of adults are working or looking for work, and work on those Foreign-born workers continued to climb — a hint that immigrants may have accounted for some of the steady employment increase.
The question now is how long policymakers will remain willing to tolerate such strong hiring without worrying that it will cause consumer demand, economic growth and inflation to reverse. Employment gains at the pace seen in March are faster than most economists think is sustainable, even taking into account the increase in labor supply.
But in recent speeches, central bankers have mostly hinted at comfort in the buoyant labor market.
The job market is “strong but rebalancing,” Jerome H. Powell, the Fed chair, said in a speech this week. He noted that job openings are down and employers are reporting in surveys that hiring is easier.
A balanced but firm job market is good news for the Fed. If businesses manage to find workers to hire, it means the economy can grow at a solid pace without overheating and generating a lot of inflation. And that means the Fed can squeeze the economy a bit more with higher interest rates — something it does to fight inflation under control — without slamming on the brakes.
In fact, the recent surprising jump in labor supply is a big reason the central bank can make a “soft landing,” where it lowers the labor market gently and doesn’t cause a painful contraction. retreat. Mr. Powell said this week that immigration was a big reason why the economy beat forecasters’ expectations for growth last year without causing inflation.
In fact, cooled the price increase from 6.4 percent heading into the year to 3.3 percent at its end, though consumer spending continued to beat forecasts.
“Our economy has been short labor, and probably still is,” Mr. Powell said, but immigration “explains what we’re asking ourselves, which is, ‘How can the economy grow more than 3 percent in a year where almost every out economist is predicting a recession?’”
However, the current pace of jobs growth is strong even when rapid immigration is taken into account, which may keep Fed officials wary that the economy is still at risk of overheating if hiring continues at this rate. speed
Economists think that as immigration increases the labor supply, job growth can remain strong without the economy overheating. A Brookings Institution review just recently It is estimated that employers could add 160,000 to 200,000 jobs per month this year without significant risk of wage increases and rising inflation. Without all the immigration, that would be more like 60,000 to 100,000.
And some Fed officials are questioning whether the central bank should cut rates at a time when inflation is proving stubborn and the economy looks like it might heat up again.
Fed policymakers have been suggesting for months that they could cut borrowing costs, now set at around 5.3 percent. But as inflation hits a hard point after months of deceleration, investors continue to push back their expectations of when that might happen, and now expect the first move in June or July only.
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, even suggested this week that if inflation stalled, it might make sense to leave interest rates at their current high levels for the rest of the year. While Mr. Kashkari did not vote on the 2024 policy, he did have a seat around the discussion table at the rate-setting meetings.
“If we continue to see inflation moving sideways, then that makes me question whether we need to make rate cuts,” Mr. Kashkari said. during an interview with Pensions & Investments, noting that the economy has “a lot of momentum.”
