Big U.S. job gains give Fed ‘much more work’ to contain inflation

The Federal Reserve will face even greater urgency in its fight to cool the US economy with a sharp increase in interest rates after the latest batch of labor market data showed an unexpected pickup in job growth and strong wage growth.

numbers Friday’s data eased fears that the US economy is slowing sharply or already in recession after two quarters of production cuts this year. However, it will add to fears that high inflation could take hold as wages rise, requiring even more intervention from the central bank.

fed has already raised its benchmark interest rate from the coronavirus pandemic low to a target range of 2.25% to 2.5% this year, including two consecutive 0.75 percentage point hikes in June and July.

Amid the latest jobs report, economists and Fed watchers say another aggressive move higher next month is more likely, although the central bank will still be examining upcoming economic the data carefully, including inflation data due next week.

“Today’s numbers should ease recession fears but reinforce fears that the Fed has much more work to do, and we now see a 75 basis point rate hike in September as likely. The inflation worries that are motivating the Fed will only be exacerbated by this employment report,” Michael Feroli, senior economist at JPMorgan, wrote on Friday.

“Jobs have not slowed down at all in response to the tightening of the Federal Reserve. It’s a double-edged sword,” added Michael Gapin, chief US economist at Bank of America, noting that while “a short-term recession is less likely,” “the risk of a hard landing is rising.”

David Merikle, chief US economist at Goldman Sachs, said the report cleared up some “ambiguity” about the strength of wage growth in the US economy, suggesting it is not weakening as much as the Fed might hope.

“The general message is that wage growth is going sideways at a rate that is probably a couple of percentage points faster than what would be consistent with achieving 2 percent inflation,” a long-standing Fed inflation target, said he. “The Fed needs to go even further than we thought today.”

Fed Chairman Jay Powell is expected to present his latest thoughts on US interest rates and the central bank’s inflation-lowering strategy at its annual conference in Jackson Hole, Wyoming, in late August.

During his last press conference in July, Powell said “another unusually large hike” in interest rates in September “might be appropriate” but that decision has yet to be made.

“This is one that we will make based on the data we see. And we are going to make decisions from meeting to meeting,” he added.

Movements in the financial markets could also influence the Fed’s next move. Traders began pricing in anticipation of higher interest rate hikes following the employment data, predicting rates would peak in March at 3.64% from 3.46% expected before the report. Fed futures show that the chances of a 0.75 percentage point rise in September rose to 67% from 33% on Thursday.

While the large number of jobs adds to the pressure on the Fed, it has been welcomed by the Biden administration as it means a sharp economic downturn is unlikely ahead of the November midterm elections.

This happens when Congress getting ready to vote on a $700 billion package aimed at curbing inflation by raising taxes on large corporations, lowering the cost of prescription drugs and reducing the budget deficit, though it would also increase spending on stimulating clean energy to fight climate change.

“This bill is a game changer for working families and our economy. I look forward to the Senate reviewing this legislation and passing it as soon as possible,” Biden said on Friday.