Strong US jobs numbers make the Fed’s job easier

[WASHINGTON] The latest US jobs numbers are likely to make the Federal Reserve’s job easier, at least for now.

For most of last year, the Fed has found itself in wait-and-see mode as it has assessed the economic fallout from the sweeping policy changes imposed by President Donald Trump that rewired global trade and upended the labour market.

The US-Israeli war with Iran threatens to thrust policymakers further into limbo. By driving up energy prices, the war is likely to make inflation worse, but it could also weaken the economy. That could put the two sides of the central bank’s mandate – stable prices and full employment – in tension with each other.

The March jobs report, however, suggests that the labour market remains relatively healthy. Job growth beat expectations by a wide margin, and the unemployment rate – which Fed officials are watching particularly closely right now – ticked down to 4.3 per cent.

That stability should give policymakers some breathing room to focus on the inflation side of their mandate, which is likely to mean that they will hold interest rates in place for now.

The Fed was already expected to hold rates steady at its next meeting, at the end of this month, and investors have steadily pushed out their estimate for when, or even if, policymakers will cut rates again.

The jobs numbers added to investors’ doubts about future rate reductions: The yield on the two-year Treasury note, which is sensitive to changes in interest rate expectations, rose sharply after the report was released. Prices in futures markets suggest that the Fed is not expected to cut rates until at least the middle of next year.

Still, the jobs data reflects the state of the labour market only through early March, when the war was just beginning to roil global energy markets. Since then, the war has further snarled supplies and lifted commodity prices, such as those for petrol and fertiliser. Shipping costs have also moved up.

Overall inflation in the coming months will be higher as a result. Consumers, facing higher expenses for some goods, are also expected to pull back on spending to some extent.

A prolonged conflict would amplify the economic impact. Officials are concerned about the extent to which consumers retreat, given that consumer spending fuels roughly two-thirds of the country’s economic growth.

Businesses, still working through last year’s tariff shock, have slowed hiring. They have yet to shed workers in droves, though anything that further squeezes their profit margins could change that.

But growth and the labour market are not policymakers’ only concerns. They are also worried about inflation, which has been running above their 2 per cent target for roughly five years. That fear has complicated whether officials can avoid reacting to the forthcoming pickup in prices, a strategy they have pursued in the past on expectations that a resulting hit to growth will outweigh any lasting inflation issues.

“You can have a series of these supply shocks and that can lead the public generally – businesses, price setters, households – to start expecting higher inflation over time. Why wouldn’t they?” Jerome Powell, the Fed chair, said at an event this week.

Despite this risk, Powell did not convey any immediate urgency to take action, saying instead that the Fed’s policy was “in a good place for us to wait and see how that turns out.”

John Williams, president of the Federal Reserve Bank of New York and a close ally of Powell, echoed that view this week as he warned that the conflict “could result in a large supply shock with pronounced effects that simultaneously raises inflation – through a surge in intermediate costs and commodity prices – and dampens economic activity.”

While Williams acknowledged that some of this had “begun to play out already,” he said he expected the burst in inflation stemming from the war to prove short-lived.

He forecast that the unemployment rate would tick down and for inflation to end the year around 2.75 per cent. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, stood at 2.8 per cent as of January. NYTIMES