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A thaw in U.S. jobs market could be good news for Fed’s inflation battle -Breaking


© Reuters. A Wendy’s restaurant displays a “Now Hiring” sign in Tampa, Florida, U.S., June 1, 2021. REUTERS/Octavio Jones

By Howard Schneider

(Reuters] – While it may have seemed like a hint that something was on the horizon for Richmond Federal Reserve President Thomas Barkin, he stated this week that it was just a hint. However, he recently spoke with officials from business who were suddenly positive about the current number of job applicants.

Barkin said that although he wasn’t quite ready to label it a trend, he could hear “the first signs of the labor market beginning to ease”, to a Baltimore-based business group. The observation is that it could be a sign of the pandemic backlog, too many jobs, too few workers, possibly thawing. This would have implications on inflation, wages and Fed policy decisions.

Friday’s release of employment data indicated that there may be some light at the end. It was the Fed’s first tangible evidence that economic aftershocks caused by the pandemic were beginning to recede.

The fact is that workers did indeed surge into work. Firms created 678,000 jobs, while the unemployment rate was 3.8%.

But wages were also flat for the Fed, relieving inflationary fears. This helped to redeem some of the Fed’s hope that workers would eventually put aside pandemic fear, overcome childcare constraints or return to work.

The employment-to-population ratio, watched by many Fed officials as an overall barometer of labor market health, rose again, to 59.9%, and is now just 1.3 percentage points below where it was before the pandemic; an additional 300,000 people were either working or looking for work in February versus the month before, and the labor force has now grown by 2.3 million in the last five months – the type of net flow back into work or jobseeking officials have been waiting for.

With the expiration of January’s childcare tax credits, pandemic fiscal assistance for households is now almost gone. Wages are much higher and employers have reported that they have used a range of incentivisations like flexible work arrangements and benefits to hire employees with more demanding working conditions.

According to Nick Bunker (research director, Indeed), “If more numbers such as this move forward, then we can be optimistic about the year,” Bunker noted. Bunker also pointed out that core labor market statistics remain within striking distance from where they were prior to the pandemic. There are 2.1 million fewer jobs than February 2020. This gap could be closed by summer’s current hiring pace. The unemployment rate, which is only three-tenths higher, and the unemployed at 6.2million, are just half a million less than they were before the pandemic.

Marty Walsh, the Labor Secretary said that it wasn’t yet time to declare the labor markets healthy from the pandemic.

“We still have work ahead of us,” he stated, referring to the 6.6% Black unemployment rate.

However, he predicted that in the next year many of the pandemic-related holes will have been closed and that we will “return to normal job days numbers.”


It is likely that the Fed will continue to plan to increase interest rates when it meets in two weeks, as long as February’s employment report does not change its current intentions. This would be to counter high inflation. Jerome Powell, Fed Chair, stated that he supports a 0.25 percentile point initial increase over the near-zero rate. Additional increases are expected throughout the year.

It may provide some relief from calls for bigger or faster rate increases, at least temporarily. Inflation and job reports have shown that wages and prices are increasing. This has pushed Fed’s current policy, which was designed to combat the pandemic, further out of line with an economic recovery.

Policymakers hope that a new dynamic emerged in the economy, resulting in a slowdown in wage increases and strong hiring, and in turn a rising labor force.

Powell pointed out in his testimony to Congress this week that the war in Ukraine had added uncertainty to the outlook.

Analysts also noted that the overall strength of hiring means that a month with flat wages might not be significant. Annual growth remains robust at 5.1%.

Aneta Markowska, Chief Financial Economist at Jefferies said that she is inclined to ignore the wage declines. “The labor market’s hot, and inflation will accelerate,” Aneta Markowska, Chief Financial Economist at Jefferies said. This could increase to 8% in March from 7.5% in January.

She said that “Policy normalization continues to be the Fed’s highest priority.”

According to the employment data, there has been a rise in normality with gains across the entire economy. This includes some of the worst-hit service sectors. An increasing number of industries are now back to their pre-pandemic levels. The hardest hit sectors, such as the leisure and hospitality industry, remain 9% below. However, they are improving.

Data from high frequencies have seen steady improvement and momentum for further improvements. The popularity of air travel is increasing, as well as in-person restaurant eating. These are bellwether activities that were marred by the fears and repercussions of the virus for over two years.

UKG Payroll Manager said that the Omicron Wave of January, which left millions off their jobs at peak, was almost gone and that there were some employment gains in troubled areas.

UKG Vice President Dave Gilbertson wrote, “It’s quite clear that people have increasingly come off the sidelines.”