The Fed Is Eyeing the Job Market, but It’s Difficult to Read

The Federal Reserve spent much of 2022 and 2023 narrowly focusing on inflation as policymakers set interest rates: Prices were rising way too fast, so they became the central bank’s top priority. But now that inflation has cooled, officials are more clearly factoring the job market into their decisions again.

One potential challenge? It’s a very difficult moment to assess exactly what monthly labor market data are telling us.

Jerome H. Powell, the Fed chair, said during a news conference on Wednesday that the way the job market shaped up in coming months could help to guide whether and when the central bank lowered interest rates this year. A substantial weakening could prod policymakers to cut, he suggested. If job growth remained rapid and inflation remained stuck, on the other hand, the combination could keep the Fed from lowering interest rates anytime soon.

But it is difficult to guess which of those scenarios may play out — and it is trickier than usual to determine how hot today’s job market is, especially in real time. Fed officials will get their latest glimpse at just how strong the job market is on Friday morning, when the Labor Department releases its April employment report.

Hiring has been rapid in recent months. That would typically make economists nervous that the economy was on the cusp of overheating: Businesses would run the risk of competing for the same workers, pushing up wages in a way that could eventually drive up prices.

But this hiring boom is different. It has come as a wave of immigration and workers coming in from the labor market’s sidelines have helped to notably increase the supply of available applicants. That has allowed companies to hire without depleting the labor pool.

Yet the jump in available workers has also meant that one of the main measures that economists usually use in assessing the job market’s strength — payroll gains — is no longer providing a clear signal. That leaves economists turning to other indicators as they try to evaluate the strength of the job market and to forecast its forward momentum. And those measures are delivering different messages.

Wage growth is still very strong by some gauges, but it seems to be cooling by others. Job openings have been coming down, the unemployment rate has ticked up recently (particularly for Black workers) and hiring expectations in business surveys have taken a turn for the worse.

The takeaway is that this seems to be a strong job market, but exactly how strong is hard to know. It is even harder to guess how much oomph will remain in the months to come. If job gains were to slow, would that be a sign that the economy was beginning to buckle, or just evidence that employers had finally satiated their demand for new hires? If job gains were to stay strong, would that be a sign that things were overheating, or evidence that labor supply was still expanding?

“Through a pre-pandemic lens, the economy looks quite strong, maybe even hot,” said Ernie Tedeschi, a research scholar at Yale Law School who was, until this spring, a White House economic adviser. But given all of the gains to labor supply, “maybe we shouldn’t use a pre-pandemic lens for thinking about the economy right now,” he said.

Friday’s jobs report is expected to show that job gains remained rapid in April: Economists are forecasting a 240,000 person jump in payrolls, according to a Bloomberg survey.

That would be a continuation of the trend over the past year. The economy added 247,000 jobs per month on average between March 2023 and March 2024. To put that in context, the economy had added 167,000 jobs in the year through March 2019, the last spring before the onset of the coronavirus pandemic.

The Fed’s policy committee voted this week to keep interest rates at 5.3 percent, where they have been set since July. Mr. Powell signaled that they are likely to stay at that relatively high level longer than previously expected, as officials await evidence that inflation is poised to cool further after months of stalled progress.

But while the path ahead for price increases will be the main driver of policy, Mr. Powell said that “as inflation has come down, now to below 3 percent,” employment also “now comes back into focus.”

For now, Fed officials have not been overly worried about rapid job gains. Mr. Powell noted on Wednesday that the economy had been able to grow more strongly in 2023 partly because the labor supply had expanded so much, both because of immigration and because more people were participating in the job market.

“Remember what we saw last year: Very strong growth, a really tight labor market and a historically fast decline in inflation,” Mr. Powell said. “I wouldn’t rule out that something like that can continue.”

On the other hand, Mr. Powell hinted that Fed officials were keeping an eye on wage growth. He suggested repeatedly that strong wage increases alone would not be enough to drive the Fed’s decisions.

But the Fed chair still signaled that recent wage gains were stronger than the Fed thought would be consistent with low and stable inflation over time. As companies pay more to attract workers, many economists think that they are likely to raise prices to cover climbing labor costs and protect profit margins.

Pay gains remain strong by key measures. Data this week showed that a measure of wages and benefits that the Fed watches closely, called the Employment Cost Index, climbed more rapidly than expected at the start of 2024.

“We don’t target wage increases, but in the longer run, if you have wage increases running higher than productivity would warrant, there will be inflationary pressures,” Mr. Powell said this week. When it comes to slowing down wage gains to a sustainable pace, “we have a ways to go on that.”

Whether job gains and wage gains will remain so rapid is unclear.

Bill Kasko, the president of a white-collar employment placement agency in Dallas, said that while he continued to see strong demand for workers, he also noticed employers becoming pickier as the outlook for interest rates and the looming presidential election stoked uncertainty. They wanted to see more job candidates, and take longer to make decisions.

“There’s still demand, it’s just not moving as quickly,” Mr. Kasko said.

If employers start to pull back more concertedly and unemployment begins to rise, that could be enough to prod the Fed to lower interest rates, Mr. Powell made clear this week. He suggested that a “meaningful” rise in unemployment could prod the central bank to lower rates.

The upshot? In a world where it is hard to tell whether robust hiring numbers are a sign that the labor market is hot or simply changing, it seems like officials would be more alarmed by a marked job market slowdown than by strong continued payroll gains.

“There’s an asymmetry in how they view the labor market,” said Michael Feroli, the chief U.S. economist at J.P. Morgan.

Ben Casselman contributed reporting.

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