Why Jobs Won’t Jolt the Fed

U.S. economy gets closer to full employment with latest jobs report.

Half of the Federal Reserve’s dual mandate is to help bring the economy to full employment. With Friday’s jobs report, it may be getting very close to achieving that goal.

But that alone may not be enough for the central bank to start lacing up its hiking boots.

The July employment report was strong all around. The economy added 255,000 jobs—better than the 179,000 economists were looking for—with upward revisions to previous months. The unemployment rate held steady, but only because more people entered the labor force. Average hourly earnings picked up by 0.3% from May, putting them 2.6% above their year-earlier level.

The report raised the possibility that the Fed will raise rates at its September meeting, although given policy makers’ caution, the odds probably favor a hold. With the Fed’s November meeting right up against the Presidential election, a December move seems the likeliest bet.

By that point, the job market could be tight. Economists at Goldman Sachs reckon that the amount of hiring needed to keep up with population growth is 85,000 additional jobs a month. Over the past three months, the economy has been adding jobs more than twice as fast. If that continues, the remaining slack in the job market could soon be drawn up. The Goldman economists reckon a 4.7% unemployment rate, plus some more part-time workers transitioning to full time, would put the labor market at full employment—the not-too-hot, not-too-cold level consistent with the Fed’s 2% inflation target.

… while that could give the comfort it needs to raise rates in December, any rate increases that come after that may still be gradual. With the relationship between the job market and consumer prices looking less certain than it did in the past …

Investors don’t expect much in the way of either inflation or growth in the years to come.

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