In June, the U.S. added fewer jobs than expected. However, the labor market still demonstrated strong wage growth and a slight decline in the unemployment rate, which is likely to keep the Federal Reserve on track to raise interest rates at the upcoming July meeting. While job gains have gradually decreased from the peak levels observed during the reopening phase, they remain above the pre-pandemic average.
The steady pace of average hourly earnings growth, hovering around 4.4% annually since April, indicates that the U.S. labor market continues to favor job seekers. Despite the softening pace, the economy is still adding more jobs than new entrants to the labor market, contributing to wage growth levels that exceed the Fed’s comfort zone for inflation. Along with persistent inflation and recent data, these factors are expected to reinforce the majority of Fed officials’ belief that further rate hikes are necessary and can be sustained without significant negative impacts on employment.
Traders, reacting to the report, have increased expectations of a rate hike at the July meeting. While the Fed’s focus has primarily been on high inflation, the progress of the labor market is crucial for achieving their goal of fine-tuning policies that lower inflation without burdening workers excessively. Job and wage growth have consistently exceeded expectations, despite the substantial rate increases implemented since 2022.
The Bureau of Labor Statistics reported that the unemployment rate has remained relatively low, and it has not reached the level that Fed officials typically associate with sufficient slack in the economy to lower inflation. Despite concerns of a potential economic downturn, companies have continued to hire and increase wages.
Fed Chair Jerome Powell has acknowledged that the labor market remains tight, but there are indications of supply and demand for workers moving toward a better balance. The number of open jobs relative to the number of unemployed individuals decreased in May, although there was an increase in the number of workers voluntarily leaving their jobs, indicating labor market strength and the potential for faster wage growth. While job openings have declined, they still remain significantly higher than pre-pandemic levels.
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