Jill On Money: Jobs, inflation, and the Fed
As we enter the homestretch for 2022, consumers, investors and Federal Reserve officials are saying “Good Riddance!” With 40 business days to go before we can close the chapter on the year, the themes remain the same: a resilient job market, stubbornly high inflation, and rising interest rates.
In October, the economy added 261,000 jobs and the unemployment rate drifted up to 3.7%. Although the employment landscape is solid, as we enter the fourth quarter of the year job growth is decelerating.
Over the past three months through October, monthly job creation has totaled nearly 290,000, down from the monthly average of 407,000 for the whole year, and a significant slowdown from the 2021 pace of 562,000.
Meanwhile, the number of Americans participating in the labor force is still low, at 62.2%, down from the 63.4% before COVID-19. Bill McBride of Calculated Risk notes that “the overall participation rate is impacted by both cyclical (recession) and demographic (aging population, younger people staying in school) reasons,” which is why focusing on 25 to 54 year old workers makes sense.
In that age group, participation is “close to the pre-pandemic levels and indicate almost all of the prime age workers have returned to the labor force.”
The most important aspect of the jobs report for the Federal Reserve is wages, which were up 4.7% from a year ago. October was the first month where annual wage growth was below 5% since December 2021. Yes, I know workers want higher wages, but the central bank wants to see wages come down in order to help alleviate the four-decade in inflation.
It seems like a long time ago that the Fed started its interest rate hikes, but it was just this past March — then, the central bank was worried about the Russian invasion of Ukraine and chose a modest 0.25% increase in the fed funds rate. That action seems quaint, considering that the same officials have recently enacted four consecutive 0.75 percentage point increases, bringing the benchmark rate to a range of 3.75 to 4%, up from zero earlier this year.
Despite the Fed’s best efforts, prices are up by more than 8% from a year ago.
The problem is one that the central bank acknowledged in the accompanying statement for the November meeting: there is a lag between the action of raising interest rates and how quickly those higher rates impact the economy.
This new addition to the official statement suggests that the central bank could pull back on the size of future rate hikes, though Chair Jerome Powell has noted repeatedly that the Fed still “has a ways to go” before reaching the “terminal rate,” which is the rate at the end of the hiking cycle.
Can the Fed get to that magical terminal rate without throwing the economy into a recession?
That’s the question plaguing investors.
The economy contracted in the first half of the year, but came back in the third quarter, which more than erased the decline. But many Americans have buckled under the pressure of inflation, dipping into their pandemic savings in order to keep the wheels of the economy turning. As of September, the Personal Savings Rate dropped to 3.1%, down from the pre-pandemic level of 9.3% in February 2020.
With consumers under pressure and businesses preparing for a slowdown, most economists are penciling in at least a mild recession in the first half of next year. The reason is with every rate hike, there is a higher probability that the Fed’s campaign will slow down the economy too much, tipping us into recession.
(Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at email@example.com. Check her website at www.jillonmoney.com)
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