Signs of Employment Market Cooling
July's US jobs data shows signs of employment market cooling which Federal Reserve officials hope can lower inflation without a significant increase in unemployment. The Labor Department's Job Openings and Labor Turnover Survey (JOLTS) revealed that 2.3% of nonfarm payroll workers quit their jobs in July, down from 3% during the pandemic's "Great Resignation". This was the lowest reading since January 2021 and comparable to 2018 and 2019 when a tight job market and low inflation coexisted. Moreover, the hiring rate in July was the lowest since April 2020, suggesting a drop in labor demand and an easing of hiring conditions.
Easing Pressure for Wage Hikes
The central bank believes that these signs are necessary to continue lowering inflation and easing the pressure for wage hikes. Policymakers hope that the adjustment occurs without the sharp rise in unemployment seen in prior Fed efforts to tame inflation with interest rate increases. The Beveridge Curve, which traces the relationship between job openings and the unemployment rate, has been steadily returning to 2019 levels, indicating a healthy balance between joblessness and inflation.
Trends Indicate a Softening Labor Market
Fiona Greig, global head of investor research and policy at Vanguard, said the July JOLTS data indicates a softening labor market. An analysis of Vanguard's 401(k) retirement plans data also suggested that hiring conditions are easing across various sectors and positions. This trend could be particularly relevant to the Fed's inflation outlook as several policymakers believe that lower-income consumers are already slowing purchases, while overall consumption is sustained by those with better earnings.
Drop in Consumer Confidence
Separate data from the Conference Board showed a drop in consumer confidence, which may signal a future spending pullback. Traders boosted bets that the central bank will hold rates steady after this data release. The central bank is expected to maintain the policy rate in the 5.25%-5.50% range at its September 19-20 meeting, and upcoming economic projections will reveal whether officials still believe rates need to rise by year-end.
Divided Opinions on Rising Joblessness
Economists are divided on whether rising joblessness is necessary to create enough economic "slack" to lower inflation. Fed Governor Christopher Waller argued that a return of the Beveridge Curve to its pre-pandemic level, driven by a drop in job openings without a rise in joblessness, could help balance the supply and demand for workers. Another measure closely watched by the Fed, the number of job openings compared to the number of people looking for work, remains around 1.5 jobs per unemployed person, the lowest since September 2021.
Fed's Breathing Room
Financial market economist Oren Klachkin believes that these data give the Fed some breathing room. However, he notes that a clear shift in the central bank's bias to maintain high-interest rates won't occur "until the data clearly show that inflation is on a clear and persistent trend to 2%." Underlying inflation, stripped of volatile food and energy costs, remains more than double the Fed's target and had shown little improvement until June. Data for July will be released on Thursday.
