Softening Labor Market Could Point to Slower Tightening by the Fed

September 6, 2022

Softening Labor Market Could Point to Slower Tightening by the Fed Photo

Due to the observance of Labor Day, we are releasing our Monday Morning Perspectives today.
Hopefully, everyone had a nice, relaxing long weekend!

Last Friday began with the release of the August jobs report. The U.S. economy added 315,000 jobs in August, fewer than the 526,000 reported in July but above consensus expectations of 300,000. This development suggests that rising interest rates and fear of a possible recession are leading companies to pull back on hiring — but at the same time, the labor market recovery remains resilient. The unemployment rate rose to 3.7% from its half-century low of 3.5% in July, coming alongside a larger labor force – with the participation rate increasing from 62.1% to 62.4%. Meanwhile, wage growth came in weaker than expected, rising 0.3% in August versus expectations of a 0.4% increase.

Based on these numbers, the labor market —which has been a big contributor to inflation — seems to be slowly softening. While the Federal Reserve (Fed) will surely tighten in September, perhaps the direction of the numbers will play into its decision to hike by a less-aggressive 50 basis points (bps) versus the expected 75 bps. This would not be out of line with Fed Chair Jerome Powell’s speech at the Jackson Hole symposium, where he stated that the decision for September will depend on the totality of the incoming data/evolving outlook — and that at some point, as the stance of monetary policy tightens further, it will likely become appropriate to slow the pace of increases.

This holiday-shortened work week will be relatively light from an economic reports standpoint. Both the final S&P U.S. Services Purchasing Managers’ Index and the Institute for Supply Management services index are expected to be released this morning. Cleveland Federal Reserve President Loretta Mester will speak on Wednesday, which is also when the Beige Book is due out. Initial and continuing jobless claims, along with quarterly service and monthly consumer credit reports, are expected on Thursday. Mester’s speech and this week’s reports should give us a clearer view of the overall inflationary picture and how the Fed will combat it in the near term.

Tags: Jobs report | Interest Rates | Labor market | Federal Reserve | Inflation

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