Jobs Report Likely Keeps Fed on Track for Rate Rise in March

Evidence of tighter labor markets and high inflation has provided new urgency for the Fed to begin draining reservoirs of stimulus it pumped into the economy after the pandemic struck nearly two years ago.

At their meeting last month, Fed officials approved plans to more quickly scale back, or taper, their bond-buying program to end it by March instead of June. They want to stop providing stimulus with those purchases before lifting short-term rates.

Minutes of that meeting, released Wednesday, showed most officials think the economy will reach conditions consistent with maximum employment soon, and some already believed that goal had been reached last month. Friday’s report isn’t likely to change that calculus. Officials have said they would raise rates once that condition is met.

The minutes also twice referred to labor markets as being “very tight,” which suggests greater conviction that the economy will need higher interest rates to slow down growth and prevent overheating.

“We’re making rapid progress toward maximum employment,” said Fed Chairman

Jerome Powell

at a news conference on Dec. 15.

Even though overall job growth was slower than economists had projected in December, strong wage growth is likely to matter more to the Fed. Average hourly earnings rose 0.6% last month, bringing yearly wage growth to 4.7%.

“The modest payroll growth and substantial wage growth is consistent with the narrative that job openings are hard to fill, and that the wage pressure we have seen in recent months is structural and unlikely to reverse any time soon,” said Thomas Simons, an economist at investment bank Jefferies. “This bodes for continued inflation pressure as well.”

Fed officials’ decision to take their foot off the gas more quickly reflects a shifting calculus about the potential for stronger demand to push up prices—such as wages and rents—even after supply-chain bottlenecks and shortages of items such as cars abate.

Brisk demand for goods, disrupted supply chains and various shortages have pushed 12-month inflation to its highest readings in decades. Core consumer prices, which exclude volatile food and energy categories, were up 4.7% in November from a year earlier, according to the Fed’s preferred gauge. That is well above both the Fed’s 2% target and officials’ stated desire to have inflation run slightly above that target.

But it has been developments in the labor market, and not just high inflation readings, that have provided fuel for the Fed’s pivot in recent weeks toward tightening policy much faster than appeared likely last summer. Friday’s report will be the last reading officials receive on the labor market before their Jan. 25-26 policy meeting, where officials are likely to continue discussions about how soon and how fast to shrink their asset portfolio once they have raised interest rates.

Fed officials still expect inflation to decelerate this year as supply-chain bottlenecks loosen, but they are more concerned about what the inflation backdrop is even after that happens because of rising wages and housing costs. They are watching for signs that a large jump in prices in 2021 doesn’t lead consumers and businesses to expect higher inflation in the future, which could create the kind of wage-price spiral that has historically led the Fed to ratchet up interest rates quickly, risking a recession.

“There’s a real risk now, I believe, that inflation may be more persistent and…the risk of higher inflation becoming entrenched has increased,” Mr. Powell said last month.

Mr. Powell’s confirmation hearing for another term as Fed chair is scheduled Tuesday before the Senate Banking Committee, giving Mr. Powell a final opportunity to clarify his thinking on the Fed’s policy-tightening preparations before officials’ meeting later this month. Mr. Powell’s current term expires early next month.

Write to Nick Timiraos at [email protected]