Friday's Surprisingly Positive Jobs Report Does Not Mean Fed Should Keep Raising Rates

Surprising most analysts and forecasters, employers added a whopping 517,000 jobs in January, according to Friday morning’s monthly labor report from the Bureau of Labor Statistics. This was almost twice the growth from December’s 260,000 jobs. The unemployment rate fell to 3.4 percent, the lowest since 1969.

What does this mean?

It may mean very little. The Bureau of Labor Statistics’s monthly report can bounce around a lot, depending on seasonal weights and samples. Next month’s job number could be far lower.

Also, keep your eye on wage growth. Average hourly earnings climbed in January at a slower pace than in December — by an annualized 4.4 percent, down from 4.8 percent in December. With prices still rising faster than wages, most workers continue to suffer declining real wage – that is, declining purchasing power.

But the strength of the labor market is likely to worry the Fed, which last Wednesday raised interest rates for the eighth time in a year – although only by a quarter of a percentage point this time.

“The labor market continues to be out of balance,” Jerome Powell, the Fed chair, said earlier this week. He stressed that we won’t have a return to his target 2 percent inflation in the service sector “without a better balance in the labor market,” adding “I don’t know what that will require in terms of increased unemployment.”

As I’ve said many times over the past year, this worry is misplaced. Most of the upward pressure on prices domestically is coming from big corporations with the market power to raise prices faster than their costs are rising. Much of the rest is coming from continuing supply shocks abroad, including Putin’s war’s effects on global energy and food prices, and China’s lockdowns followed by COVID.

And, as Friday’s report shows, wage gains are slowing and they lag behind price increases.

The basic reality is American workers don’t have the power to raise their wages. Big American corporations have the power to raise their prices. The Fed should not be aiming to increase unemployment as a means of slowing prices.