Federal Reserve policymakers are debating how much more interest rates need to be raised to bring inflation back to a more modest pace, and that calculation is likely to depend largely on the strength of the job market.
Friday’s jobs report probably did little to change policymakers’ minds about the current state of the labor market.
While job gains are slowing, wage growth remains stronger than usual: Average hourly earnings rose 4.4 percent in the year through June, compared with expectations of 4.2 percent, and wage gains for May were revised higher. I went. Fed officials are watching the wage increase closely, as they worry that if wage growth remains unusually sharp, it could be difficult to fully return elevated inflation to their 2 percent target.
Argument? Companies that are paying their workers better may try to raise their prices to cover higher labor bills, and higher-earning households will be more able to afford higher prices.
Fed officials have been surprised by the economy’s ability to maintain power for 16 months only to slow it by raising interest rates, making it more expensive to borrow money. While growth is slowing, the housing market has begun to stabilize and the job market remains unusually strong opportunities galore and at least some bargaining power for many workers.
That flexibility — and the persistence of accelerated inflation, especially for services — is why policymakers are expected to continue raising interest rates, which they have raised above 5 percent for the first time in nearly 15 years. Officials raised rates slightly this year compared to last, and they kept rates unchanged at the June meeting for the first time in 11 meetings. But many policy makers have made it clear that even though the pace has slowed, they still expect to raise interest rates further.
Federal Reserve Bank of Dallas President Laurie K. Logan said, “It might be wiser to skip the meeting and move slowly.” during a speech This week, given that it is important for the authorities to continue raising rates now.
He added that “inflation and the labor market are developing more or less as expected, which won’t really change the outlook.”
fed official predicted in june That they will raise interest rates twice more this year – assuming they go ahead with quarter-point increases – and that the labor market will soften, but only slightly. they saw unemployment rate rising to 4.1 per cent from 3.6 per cent in June.
Investors widely expect Fed officials to raise interest rates at their July meeting, and labor market strength could help shape the outlook thereafter. While policymakers won’t release new economic projections until September, Wall Street will be monitoring how policymakers are reacting to economic growth to gauge whether another move this year is likely.