Data: Bureau of Labor Statistics via FRED; Chart: Axios Visuals
Things change fast in a pandemic. And a rapidly changing economy has the Federal Reserve playing catch-up.
Less than a month ago, the Fed made an abrupt pivot toward a more hawkish monetary policy stance. By the end of last week, the data was pointing toward an even faster withdrawal of stimulus.
Why it matters: Cheap money has become baked into the economy, so the Fed’s moves to take it away will bring risks of abrupt swings in markets that could spill back over into the economy.
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By the numbers: Friday’s jobs data are Exhibit A. While initial headlines focused on soft growth in payroll numbers, the report points toward a labor market that has become exceptionally tight, contributing to already high inflation.
The unemployment rate is down to 3.9%. In the last economic cycle that level was not reached until May 2018 — at which point the Fed had already raised interest rates six times (now: zero).
Wages are not only rising, but rising at an accelerating pace. Average hourly earnings rose 4.7% over the entire course of 2021, but at a 6.2% annual rate in the final three months of the year.
Between the lines: A simple way to look at the monthly jobs numbers is to look at whether employers added a lot of positions to their payrolls (good!) or not (bad!).
But which numbers matter most depends on the economic moment. For example, job growth numbers tend to be useful for detecting when the economy is falling into recession.
Right now with inflation concerns paramount, indicators of labor market tightness — like the unemployment rate — are most likely to get the Fed’s attention.
A broad measure of underemployment (known as U-6) is also nearly back to its pre-pandemic level. It fell to 7.3% in December, compared to 7% in February 2020.
What they’re saying: “No matter how you slice the data it’s hard to avoid the conclusion that the labor market is very tight,” writes Michael Feroli of JPMorgan in a note.
Futures markets agree, and now price in 70% odds of a March rate increase, according to CME Group, up from 36% in early December.
Yes, but: While the labor market overall is healing rapidly, the improvement is not uniform. The unemployment rate among Black Americans actually rose 0.6 percentage points in December, to 7.1% — and Fed leaders have said they aim to achieve broad and inclusive prosperity.
The bottom line: The labor market has gotten tighter, faster than most people, including at the Fed, thought possible just a few months ago. Now, policy is on track to follow suit.
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