By Ann Saphir

(Reuters) – It isn’t as if U.S. central banks needed any more reason to increase the rate of interest rates hikes.

They got it on Friday when the Bureau of Labor Statistics’ most recent jobs report revealed that employers had added 431,000 payrolls to their accounts last month, and that the unemployment rate dropped to 3.6% for the second consecutive year.

These signs indicate a strong labor marketplace that does not require the Fed to deliver the type of super-easy policy it is currently using and which has already begun to unravel.

Oxford Economics’ Kathy Bostjancic, Lydia Boussour and Oxford Economics’ Lydia Boussour wrote that the labor market became even more tight.

Futures contracts that are tied to Fed’s rate of policy fell following the employment report. Expectations increased that Fed would increase its next monthly meeting and in June to raise the Fed’s interest rates by one-half percent each time.

Futures rates contracts represent odds-on bets that the annual policy rate will range from 2.5% to 2.55%. There is a one-in three chance it could go even higher. This is enough to stop growth in any way you want.

It was just two weeks ago that the Fed raised interest rates by a quarter-of-a-percentage point in its first policy tightening in three years, and signaled ongoing rate hikes ahead to rein in inflation at a 40-year high and climbing.

The average hourly wage was 5.6% more than it was a year ago in March’s labor markets report. This despite the fact that borrowing costs have risen which may be a signal to central banks for an “wage price spiral” in construction that could lead to higher inflation.

For a related graphic on Wage growth accelerated in March, click https://tmsnrt.rs/35ypiRK

Policymakers projected an ending-of-year rate of 1.9% at their March meeting. Since that time, a few, including Fed Chair Jerome Powell have expressed their desire to move quicker.

This raises new questions about whether or not the Fed will end up too tightening, causing the economy to fall into recession. It’s rare in the past that the Fed avoids such an outcome when the unemployment rate is as low as now.

For a related graphic, click https://tmsnrt.rs/3DzYUBV

That’s exactly what the Fed wants.

Fed’s Powell said that inflation could accelerate further after Russia invaded Ukraine, sending oil prices up, and the COVID-19 epidemic in China threatening to damage already stressed supply chains. He also stated that tamping inflation was essential to maintaining a strong labor force.

A measure called the personal consumption expenditures price indicator is used by Fed to target 2% inflation. That measure increased to 6.4% in February.

Politicians don’t wish to put at risk the expectation of higher prices becoming ingrained into American business and household psychology. To curb the demand and reduce that risk, rate hikes can be used.

Furthermore, policymakers argue that the labor force market meets the standards of full employment and can withstand the rapid withdrawal of support.

Friday’s report provided more ammunition for this argument. Report authors stated that the unemployment rate is “little different” from 3.5% in the period before the pandemic.

This helps to confirm the Fed’s belief that the workers who have been affected by the pandemic could find their way into the labour force once COVID-19 is over.

Workers in their prime years (25-54 years old) increased their participation in the labor market to 82%, which is the highest figure in 2 years. The majority of industries are at or near their pre-pandemic levels of employment.

For a related graphic on Jobs by industry Jobs by industry, click https://tmsnrt.rs/2T7xMc7

According to the report, U.S. total employment is still at 1.6 Million below pre-pandemic levels.

Fed policymakers are increasingly recognizing that the deficit will be filled slowly, and is not likely to be reduced quickly by keeping interest rates low.

For a related graphic on Remaining jobs gap, click https://tmsnrt.rs/3ltQPaO