Unemployment rate drops rapidly, adds upward pressure on interest rates

Economists expect new data showing the unemployment rate is falling and wages rising to cement the Federal Reserve’s plan to start raising interest rates this year as it tries to put a brake on high inflation.

The unemployment rate fell to 3.9% in December, based on data collected in a period well before the worst of the virus wave caused by the omicron.

Unemployment peaked at 14.8% in April 2020 and had hovered around 3.5% for months before the start of the pandemic. The fact that it is returning to near normal levels so quickly has led many central bankers to determine that the United States is moving closer to what they believe to be “full employment,” even though millions of former employees have not yet re-entered the workforce. .

“This confirms the Fed’s conclusion,” Diane Swonk, chief economist at Grant Thornton, said following the report. “It’s a hot job market. “

Signs abound that jobs are plentiful but workers are hard to find: Job vacancies are at high levels and the proportion of people leaving their jobs has just hit an all-time high.

Employers are complaining that they are having trouble hiring, and a shortage of workers has led many companies to cut hours or cut back on services. As a result, employers started paying more to retain employees and attract new candidates.

Average hourly wages rose 4.7% in the year through December, faster than economists in a Bloomberg survey expected and much faster than the typical rate of advance before the pandemic .

These rapid wage gains are seen as a signal to Fed officials that people who want a job and are available for work are generally able to find it; the labor market is what economists call “tight” and potential workers are relatively scarce; and wages could start to flow into prices. When businesses pay more, they can also charge their customers more to cover their costs.

Some Fed officials fear that rising wages and limited output could help keep inflation high – now near a 40-year high. The combination of a healing labor market and the threat of runaway inflation has prompted central bankers to speed up their plans to withdraw political aid to the economy.

Fed officials are already slowing down the big bond purchases they used to support the economy. On top of that, they could hike rates three times in 2022, based on their estimates.

Economists believe these increases could start as early as March. This would make borrowing for cars, homes and business expansions more expensive, slowing spending, hiring and growth.

“It makes sense to start as soon as possible,” said James Bullard, chairman of the Federal Reserve Bank of St. Louis, on a call with reporters Thursday, suggesting the measures could come very soon. “I think March would be a definite possibility.”

Officials have signaled that once the rate hikes begin, they could quickly start shrinking their balance sheets – where they hold the bonds they bought to fuel growth throughout the pandemic downturn. This would help raise long-term interest rates, strengthen rate hikes, and further slow lending and spending.

Economists speculated in the wake of the jobs report that the new figures made an imminent rate hike even more likely and that the central bank might even be prompted to withdraw economic support more quickly as wages take off.

“We believe today’s report strengthens the case for the Fed launching its bull cycle in March,” Bank of America researchers wrote after the data was released. “The economy appears to be operating below the maximum employment rate and inflation remains high.”

Stephen V. Lee