Federal Reserve officials said they were looking for the labor market to cool as they consider how much more they need to do to slow the economy, and Friday’s jobs report suggested policymakers may still have work to do.
Employers were hiring hungrily in January, the unemployment rate fell to a level not seen since 1969, and the average work week has increased – all of which suggest that demand for work is growing.
At the same time, however, wage growth continued to decelerate. Average hourly earnings rose 4.4 percent for the year, more than expected in a Bloomberg survey of economists, but down from 4.8 percent in December. Wages growth has been slowing for several months, though it remains faster than usual and is still significantly faster than the pace that Fed officials sometimes they suggested would be in line with their 2 percent inflation target.
Fed officials raised interest rates by a quarter of a point this week, and as Wall Street now waits to see how high officials eventually push borrowing costs up and how long they stay elevated. All in all, the jobs data offered something of a mix for the Fed to choose to focus on either slowing wage growth or brisk hiring and falling unemployment.
But officials recently emphasized that labor demand remains too strong, so the new hiring numbers offered little comfort on that front. And policymakers may question whether wage growth can continue to slow when unemployment is so low and employers are so eager to cut workers.
“The risks are now they may need to do more,” Kathy Bostjancic, chief economist at Nationwide, wrote in a post-publication note.
Central bankers usually encourage workers when they get jobs and pay raises, but they worry that today’s strong labor market could stop inflation from cooling altogether. When companies raise wages quickly to compete for a limited pool of workers, they can charge more to cover their climbing labor bills. In addition, higher incomes could prompt consumers to spend more, keeping demand strong.
“The labor market remains unbalanced,” Fed Chairman Jerome H. Powell said earlier this week.
Mr. Powell said this week that the Fed would watch economic data ahead of its next policy meetings in March and May. And he stressed that if the labor market did not cool further, inflation could remain high in the service sector, where labor is the main prize.
“My own view would be that you’re not going to have — you know, a sustainable return to two percent inflation in this sector without a better balance in the labor market,” he said at his news conference. “And I don’t know what it will take in terms of increased unemployment.”
