As hiring spree defies Fed, good news on jobs could turn out to be bad news later.

According to a survey released on Friday, the labor market in America is remarkably healthy, with the unemployment rate at its lowest level in 50 years, earnings increasing quickly, and employers ramping up hiring.

The good news, though, might eventually cause President Biden problems.

Employers added 528,000 jobs in July, and compensation increased by 5.2 percent from a year earlier, according to a report that was praised by Mr. Biden and his staff as proof that the country is not in a recession. However, the Federal Reserve may need to take more decisive action to slow the economy as it attempts to get inflation under control given the continuing scorching pace of hiring and wage increases.

Fed officials have been watching for indications that the economy is slowing down, particularly the labor market. They anticipate that the glut of applications will eventually equal the glut of workers needed by companies, relieving pressure on wages and allowing establishments like restaurants, hotels, and merchants to moderate price hikes.

Since moderation has eluded them, central bankers may continue to quickly raise interest rates in a bid to slow the economy and contain the fastest inflation in forty years. Aggressive policy changes by the Fed may raise the possibility that the economy will enter a downturn rather than the so-called “soft landing” that policymakers have been working to create.

In the near future, a recession is extremely unlikely to occur, according to Michael Gapen, head of US macroeconomic research at Bank of America. But I’d also add that figures like these increase the possibility of a more abrupt landing in the future.

Interest rates are a brutal instrument, and historically significant Fed changes have frequently sparked recessions. Following the announcement on Friday, stock prices dropped, an indication that investors are concerned that the fresh statistics raised the likelihood of an unfavorable economic outcome in the future.

The White House welcomed the jobs statistics as positive news and a reassurance that the economy is not in a recession, despite the fact that gross domestic product growth has slowed this year, even as investors focused on the risks.

In an interview, White House Council of Economic Advisers member Jared Bernstein said, “From the president’s standpoint, a solid jobs number is always highly desirable. And this is a really positive report on jobs.

However, the study seemed to cast doubt on the administration’s assessment of the state of the economy. For months, Mr. Biden and White House representatives have argued that job growth would eventually halt. They claimed that a slowdown would be a positive indication that the economy was shifting to more stable growth with lower inflation.

Although White House officials gave no indication on Friday that they were concerned about it, the absence of such a deceleration could be a harbinger of more persistent inflation than administration economists had hoped.

Karine Jean-Pierre, the press secretary for the White House, told reporters at a briefing, “We think it’s wonderful news for the American people.” “We believe that the move to more steady and stable growth is yet ahead of us.”

The Employment Situation in the United States

The fact that employment growth in July greatly outpaced projections demonstrates that, despite the Federal Reserve’s efforts to slow the economy, the labor market is not slowing down.

The Fed had also anticipated a cooling off period. Several different pieces of information have pointed to a slowdown in the job market prior to the employment report for July: While job opportunities were still high, wage growth had been gradually slowing down, and while unemployment insurance filings were still low, they had been trending upward.

That development had been welcomed by the Fed, but the fresh data called the moderation into question. Since April, there has been a monthly increase in the average hourly wage, and Friday’s news culminated a hiring streak, indicating that the job market has finally restored to its pre-epidemic level.

Blerina Uruci, a US economist at T. Rowe Price, said reports like this “highlight just how much more the Fed needs to do to drive inflation down.” The work market is still extremely hot.

In an exceptionally quick pace, central bankers increased borrowing costs by three-quarters of a percentage point at each of their most recent two meetings. At their meeting in September, officials had predicted that they might slow down and raise interest rates by a half-point, although that prediction was partially based on their belief that the economy would be sharply contracting.

Instead, according to Omair Sharif, the founder of the research firm Inflation Insights, “I think this report makes three-quarters of a point the base scenario.” This isn’t the kind of slowdown the Fed is attempting to create to relieve pricing pressures, as the labor market is still humming along at full throttle.

Fed policymakers typically support good hiring and pay increases, but recent wage growth has been so rapid that it may be challenging to contain inflation. Employers who pay more must either raise their prices for consumers, increase productivity, or lose money. Typically, increasing prices is the quickest and most sensible course of action.

Additionally, even strong pay growth has fallen short for the majority of workers as inflation has skyrocketed. Consumer prices increased 9.1 percent over the year through June, despite the fact that earnings have increased 5.2 percent over the last year, much faster than the 2 to 3 percent growth that was typical before the pandemic.

Officials at the Fed are working to get the economy back to a point where pay increases and inflation are slower in the hopes that once prices begin to rise gradually once more, workers will be able to eke out wage increases that make them better off over the long term.

Price stability is ultimately what helps the entire economy function, according to Jerome H. Powell, the Fed chair, who made this argument at a news conference in July.

Some well-known Democrats have questioned whether America should rely so much on Fed policies, which work by harming the labor market, to control inflation. Democratic senators Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts have both asserted that there must be a better solution.

However, the majority of the reforms that Congress and the White House could do to reduce inflation would take time to take effect. Dear Economists: The Inflation Reduction Act, a climate and tax plan from the Biden administration, would have a negligible impact on price hikes in the short term, but it might assist more in the long run.

The Council of Economic Advisers’ Mr. Bernstein argued that Friday’s report would allow the Fed additional room to raise rates without harming workers, despite the White House’s avoidance of making recommendations to the Fed.

“This labor market’s depth of strength is not only a safety net for working families,” he remarked. It also allows the Fed freedom to act as necessary in order to keep the labor market robust.

However, in the coming months, the central bank can find itself in an awkward situation.

According to an inflation estimate that will be released on Wednesday, consumer prices grew little in July as gas prices declined. However, gas prices are unpredictable, and other indications that inflation is still out of control are likely to endure: Rents are quickly rising, and the cost of many services is increasing.

Additionally, the still-hot labor market will probably support the idea that things are not cooling off rapidly enough. Because of this, the Fed may continue to try to slow down economic growth even as there are first signals that inflation may be temporarily slowing down.

In the upcoming few months, the inflation rate will slow, according to Mr. Sharif. Even while overall inflation is slowing down, “the activity part of the equation is not cooperating at the moment.”

Reporting was given by Isabella Simonetti.

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