Unexpected job boost confuses Fed economic models – Boston News, Weather, Sports

WASHINGTON (AP) – Is the Federal Reserve wrong?

For months the Fed cautiously watching the US economy’s robust job gains out of concern that employers, desperate for staff, will continue to raise wages and hence inflation. But in January Blowout Job Growth coincided with an actual slowdown in wage growth. And this was followed by an easing of numerous inflationary measures in recent months.

Last year’s consistently robust hiring gains have defied this as well Fastest rise in the Fed’s benchmark interest rate in four decades — an aggressive attempt by the central bank to curb the hiring rate, economic growth, and rising prices that have plagued American households for nearly two years.

Instead, economists were stunned when the government reported on Friday that employers added an explosive 517,000 jobs last month and that the unemployment rate fell to a new 53-year low of 3.4%.

“Today’s job report is almost too good to be true,” said Julia Pollak, chief economist at ZipRecruiter. “Like $20 bills on the sidewalk and free lunches, falling inflation coupled with falling unemployment are the stuff of economic fiction.”

In economic models used by the Fed and most mainstream economists, a labor market with high recruitment and a low unemployment rate typically leads to higher inflation. In this scenario, companies are forced to keep increasing wages to attract and retain workers. They often pass these higher labor costs on to their customers in the form of price increases. Your higher paid workers also have more money to spend. Both trends can add to inflationary pressures.

But while hiring has been solid over the past six months, year-on-year inflation has fallen to 6.5% in December from a peak of 9.1% in June. Much of this decline reflects lower gas prices. But even excluding volatile food and energy costs, the Fed’s preferred measure of inflation has risen at an annual rate of about 3% over the past three months — not that far above its 2% target.

These trends have raised questions about a core aspect of the Fed’s interest rate policy. Chairman Jerome Powell has said to overcome inflation would require “some pain”. And Fed policymakers are forecasting the unemployment rate to rise to 4.6% by the end of this year. In the past, such a sharp rise in the unemployment rate has been associated with a recession.

Still, Friday’s report raised the possibility that the long-standing link between a buoyant job market and high inflation has broken. And this collapse presents an enticing possibility: Inflation could fall further even if employers continue to add jobs at a healthy pace.

“This suggests that traditional Fed models do not describe the current situation and that this time may actually be different,” Pollak said in an interview.

“The pandemic has pushed the job market into a completely different territory,” she continued. “And that’s just not how the usual forces can operate here.”

However, it’s also possible that Friday’s report could nudge the Fed in the opposite direction: Continued strong job growth could persuade Powell and other officials that despite signs that wage growth is slowing, a strong labor market will inevitably pull inflation back will fuel. In that case, their benchmark rate would need to stay high to slow down the hiring pace.

(Copyright (c) 2022 Sunbeam Television. The Associated Press contributed to this report. All rights reserved. This material may not be published, broadcast, transcribed or redistributed.)