U.S. job growth remains strong

Policymakers have kept interest rates at 5.3% since July 2023, the highest level in decades, making it more expensive to get a mortgage or carry a credit card balance. This policy setup is slowly affecting demand across the economy, with the goal of keeping runaway inflation under control.

But as inflation slows, Fed officials have made clear that they are trying to strike a delicate balance: They want to keep inflation under control but avoid upending the labor market. Given this, policymakers have signaled over the past month that they will respond to the sudden weakness in the labor market by lowering borrowing costs.

Federal Reserve Chairman Jerome Powell said in a speech this week that the central bank would like to see more soft inflation data “like we’ve seen recently” before cutting rates. “We also want to see the labor market remain strong,” he said. “We’ve said that if we see the labor market weakening unexpectedly, that’s also something that could prompt a response.”

That's why the employment reports are likely to be a key reference point for central bankers and Wall Street investors eager to see what the Fed will do next.

For many years, the Fed has been watching the labor market for a different reason.

Officials were concerned that keeping labor market conditions too tight for too long, with employers struggling to hire workers and paying ever-increasing wages to attract them, could help keep inflation faster than usual. That’s because companies with higher labor costs might charge more to protect profits, and workers who earn more might spend more, keeping demand going.

But recently, job openings have fallen and wage growth has slowed, signs that the labor market is cooling off. That’s what’s caught the Fed’s attention.

“At this point, we have a good labor market, but it’s not frothy,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in an interview. Modern speech“A slower labor market in the future could translate into higher unemployment rates, as companies need to adjust not just job openings but actual jobs.”

The unemployment rate has ticked up slightly this year, and officials are watching cautiously for a more pronounced move. Research shows that a sudden, sharp rise in unemployment is a sign of recession — which can slow economic growth. By experience This rule was developed by economist Claudia Sahm, and is often referred to as the “Sahm ​​rule.”