Balancing the Inflation-Recurrence Equation:

The Federal Reserve’s decision on whether to hike interest rates this month has been a subject of intense speculation, especially following the release of the February jobs report. While the number of payroll gains trounced estimates, topping 311,000, the unemployment rate rose, and wage growth was weaker than expected. The problem of strong job growth and worker shortages persisting even as wage growth slows raises an important question: are Fed rate hikes having much of an impact on reducing pay increases and inflation by cooling the labor market? If not, what’s the risk of their aggressive hikes tipping the economy into a recession?

Strong job growth: A puzzle

The economy has been experiencing solid job growth as employers continue to add more jobs each month. Monthly job growth has averaged a vigorous 351,000 since December, marking the creation of 4.8 million new jobs last year, which is impressive. In addition, unemployment numbers rose last month from a 54-year low of 3.4% to 3.6%, which is still historically low. Even with near-record job openings, however, wage growth has slowed. As a result, the average yearly wage increases have moderated from 5.9% in March 2022 to a still elevated 4.6% last month.

If unemployment is low, why is wage growth slowing?

The question on everyone’s mind is: Why has wage growth fallen in a very strong labor market? This is a question that even Goldman Sachs asked in a recent research note. Traditionally, strong employer demand for a limited pool of workers leads to sharp pay increases as businesses compete for job candidates. However, this hasn’t been happening, and it’s puzzling economists.

The impact of Fed rate hikes on inflation and recession risks

If the Fed rate hikes do not impact the labor market much, then there is a growing concern that Fed officials may be worrying more about the risk that their aggressive hikes may tip the economy into a recession. By raising interest rates, the Fed makes it more expensive for consumers and businesses to borrow, theoretically weakening the economy and discouraging employers from hiring. But how much of an impact is the Fed’s rate hike decision having on the economy, and is it worth the risk of potentially tipping the economy into a recession?

The big question: How long will high inflation last?

According to Fed Chair Jerome Powell, the biggest remaining problem is inflation in underlying, non-housing-related services such as health care and education. The costs for these services are fueled by employee wage increases, which companies pass to consumers through higher prices. Higher wages also encourage workers to spend more, which increases prices. So, there’s a job for the Fed to align labor demand better.

Related Facts

-The unemployment rate rose from a 54-year low of 3.4% to 3.6% last month, which is still historically low.

-The economy created a solid number of 4.8 million new jobs last year.

-While wage growth has slowed, the job market remains strong, and worker shortages persist.

Key Takeaways

-Strong job growth has continued despite slowing wage growth, puzzling economists.

-The Fed’s rate hike decision risks tipping the economy into a recession.

-Inflation in underlying, non-housing-related services is the biggest remaining trouble spot.

Conclusion

With a solid job market and worker shortages, Although the Fed has decided to raise interest, wage growth has been slowing, puzzling economists. There is a concern that the Fed’s aggressive hikes may tip the economy into a recession, and there’s still a job for the Fed to do in better aligning labor demand. Only time will tell how these issues play out.