Federal Reserve officials who have been looking for continued improvement in the labor market received a discouraging piece of news on Friday, when the Labor Department reported that employers added 235,000 jobs in August — far fewer than projected and a sign that the Delta variant may be weighing on hiring.
The Fed has been buying $120 billion in government-backed bonds each month to keep longer-term interest rates low and many types of borrowing cheap, bolstering lending and spending to help the economy heal. Officials are debating when and how to pare back those bond purchases, and investors are looking for an announcement about the planned start of the so-called taper at one of the Fed’s coming meetings.
But central bankers have tied their policy path closely to the labor market, suggesting that the economy has not yet quite achieved the “substantial further progress” they had hoped to see on the jobs front. Officials including Jerome H. Powell, the Fed chair, have signaled that although the economy has made adequate strides toward the central bank’s inflation goal to justify a slowdown in bond buying, they would like to see continued job gains before they feel confident in removing support.
Mr. Powell said during a speech last week that as of the Fed’s July meeting, he and most of his colleagues thought the Fed could start reducing the pace of asset purchases this year if the economy performed as they expected.
“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant,” Mr. Powell added, saying that the Fed would be “carefully assessing incoming data and the evolving risks.”
The August jobs report showed a sharp pullback in hotel and restaurant hiring, which tends to be particularly sensitive to virus outbreaks. At the same time, wages for those workers continued to rise, as did pay for workers overall, suggesting that employers are still paying up to lure people into work.
Leisure and hospitality wages are well outpacing overall wages.
Percent change in earnings for non-managers since January 2019
“I’m not sure that I want to read a lot into today’s softness, in terms of what it means for the Fed,” said Omair Sharif, founder and president of Inflation Insights. He said he expects the Fed to announce a taper in November, leaving time for it to see further improvement.
Other economists thought that Friday’s report could reinforce the Fed’s patience.
“Officials will probably be more inclined to wait for more data before deciding on when a tapering announcement and an actual scaling back of asset purchases may be appropriate,” Rubeela Farooqi, chief U.S. economist at High Frequency economics wrote in a note following the release.
And the fact that wages continued to move up could make the report a hard one for policymakers to interpret. The fresh data put the Fed “in an uncomfortable position — with the slowdown in the real economy and employment growth accompanied by signs of even more upward pressure on wages and prices,” Paul Ashworth, chief U.S. economist at Capital Economics wrote.
Even after it begins to slow its bond purchases, the Fed has other tools to support the economy and ensure that the labor market returns to a situation in which everyone who wants a job can get one. The central bank’s main policy interest rate, which guides short-term borrowing costs and affects consumer rates from mortgages to car loans, is at rock bottom and is likely to stay there for months or even years.
But slowing bond purchases will be the first step toward a more normal policy setting, and a sign that the Fed thinks the economy has come through the turbulent pandemic lockdown period and is making strong progress toward a full recovery.
The central bank is tiptoing gingerly when it comes to removing policy support compared to after past recessions: The unemployment rate dropped to 5.2 percent in the August report, and is likely to be substantially lower by the time the Fed increases rates. After the 2008 recession, the Fed had finished tapering and raised rates in late 2015, when joblessness was around 5 percent.
The slower reaction this time comes in part because economic conditions have been evolving so quickly. But more than that, many policymakers have come to see the Fed’s decision to start raising interest rates in 2015 — before the labor market was operating at full speed or inflation had stabilized — as a mistake. The Fed formally reworked its policy approach last year, laying out a more patient game plan and qualifying its employment target as a “broad-based and inclusive goal.”
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August Jobs Report is Concerning News for Fed - The New York Times
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