MNI: US Labor Market To Tighten Despite Fed Rate Hikes

The U.S. unemployment rate will likely fall toward 3.5% this year and wage pressures remain high despite the Federal Reserve's plan to lift interest rates, as officials seek to preserve labor market gains even as they move to contain inflation expectations, former Fed and Labor Department officials told MNI.

After 40 to 50 years of decline in labor’s share of national income, the Fed welcomes growth at the bottom of the wage distribution, the former officials said, particularly as higher pay would mitigate the effect of inflation on those most exposed.

“I do think it means that the Fed has to carefully manage inflation expectations. That's part of what they're trying to do by moving more quickly to raise rates," said Stephanie Aaronson, former assistant director of the research division at the Fed Board of Governors, now at the Brookings Institution. "It certainly is possible for the FOMC to raise rates to a more neutral level that would slow the recovery in employment but would not put a stop to it.” (See MNI: Fed To Frontload Hikes But Keep Eye On Jobs--Ex-Officials)

JOBS REPORT STRENGTH

A surprisingly strong January jobs report in spite of a decline in workers' willingness to supply labor amid the Omicron wave reaffirmed signals that the jobs market is very tight, the former officials said. Employers added 467,000 jobs, twice market expectations.

"It would have been much higher without Omicron," said Aysegul Sahin, a University of Texas at Austin professor, current Fed adviser and former New York Fed economist, noting that labor force participation stayed flat in the month despite the virus. She expects participation, the only lagging labor market indicator, to rebound mildly in coming months and to end the year at its trend rate of mid-62%, while unemployment could slide towards 3.5%, even with Fed hikes, probably as low as is possible in the U.S.

Wage growth may moderate, but is unlikely to stop, as staff shortages deliver a boost to low-salaried workers on a scale not seen for many years, former officials said.

TAPPING THE BRAKES

"We’ve had less workforce growth than expected in the past year. You can see that in the adjustments to the household survey in the January report. That could help increase wages," along with more worker demands and more transparent labor markets, said Erica Groshen, former head of the U.S. Bureau of Labor Statistics.

The Fed is keen to keep unemployment where it is by "tapping the brakes and not slamming them," she said.

"We’re going to slow down business activity just enough that inflation starts to come down, because the bottlenecks are being resolved and workers are being reallocated to the best place for them. Productivity will go up and prices won’t have upward pressure either. We’ll get this settling down right at 4%. That’s what they’d like to achieve. And everybody hopes they will."