The labor market has recovered the jobs lost to the pandemic, reaching a new labor-force high of 155 million people. Concurrently, the unemployment rate has fallen to 3.4%, the lowest rate since the late 1960s. Over 4.8 million jobs were added in 2022, yet 11 million job openings remain—two for every unemployed person.
Angus: How does a strong labor market effect monetary policy?
Amy: A strong job market supports consumer spending—a headwind to the Fed’s campaign to slow inflation—possibly forcing the Fed to raise interest rates higher than investors currently expect. One year into the hiking cycle, inflation is slowing (Consumer Price Index (CPI)), yet some portions of inflation remain stubbornly high. Specifically, service inflation remains elevated as consumers switched buying habits from goods to services (restaurants, hotels, airfare, healthcare). As long as jobs are plentiful, inflation can stay elevated, forcing interest rates higher.
The Fed is resolute in its fight to reduce inflation closer to its 2% target. Its aggressive tightening campaign, in addition to tighter bank lending standards, will eventually work its way through the economy, forcing companies to react to higher costs by cutting jobs to maintain profit margins and earnings. Employment is considered a lagging economic indicator because of the time it takes for monetary policy to play out. Eventually, though, net job additions will slow as higher rates slowly infiltrate the economy, allowing the Fed to end this tightening cycle
