(Bloomberg) — The long-awaited U.S. jobs report has the potential to tip the scales toward a third big rate hike later this month after a wave of data showing consumer resilience and strong job demand.
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Friday’s report is one of the last marquee releases Fed officials will have before a policy meeting in mid-September to help them decipher a complex economic and inflation puzzle.
Forecasts call for a healthy but more modest gain of 298,000 in August payrolls and for the unemployment rate to hold steady at 3.5%, the lowest in five decades. Steady wage growth is also expected amid a persistent mismatch between labor demand and supply.
Such data, combined with a July jobs bump, improving consumer sentiment and a jobs surprise, could be enough to prompt the Fed to raise borrowing costs by 75 basis points, extending the steepest rate hikes in a generation. to curb the wave of inflation.
“Against all of this data, this report becomes very important,” said Anna Wong, chief U.S. economist at Bloomberg Economics. It could “put a seal of approval” on the trend other data shows — that the economy is very resilient.
However, any sign of much softer employment growth in Friday’s report, combined with a larger slowdown in the Labor Department’s average hourly earnings, could help shift expectations toward a half-point rate hike. However, Fed officials will need to see consumer price index results later this month to crystallize their views on the appropriate policy response.
Fed Chairman Jerome Powell said last week that the central bank’s decision later this month “will depend on the totality of incoming data and the evolving outlook.”
Thursday’s new data suggests that demand for labor continues to be healthy. Initial claims for jobless benefits fell for a third week to a two-month low, while the factory employment index rose to a five-month high.
Bond yields extended gains on the day, the dollar rose and stocks fell further. Swap investors pushed higher, to more than 70%, the likelihood that the Fed would raise interest rates by 75 basis points at this month’s policy meeting.
An important element of the jobs report will be the pay metrics. Economists expect the report to show a 0.4% increase in average hourly earnings from a month earlier and a 5.3% increase from August 2021. The annual increase would represent a slight acceleration from the previous two months .
A slowdown in wage growth could give Fed officials some comfort by suggesting an easing of inflationary pressures, although that is not always the case, said Claudia Sahm, founder of Stay-At-Home Macro (SAHM) Consulting and a former economist of the Fed.
“Everything has to be looked at in terms of ‘what could this mean for inflation?’ said Sam.
Companies have raised wages across all industries and income brackets to attract and retain workers. That underpins consumer spending as Americans face rising prices for essentials like food and rent. It also makes it much harder to challenge the Fed to slow the economy to stem price gains.
New data from the ADP Research Institute on Wednesday showed that average annual pay for those who remained in their jobs rose 7.6% in August compared with a year earlier. Job-changers saw more than double that.
Still, U.S. firms added jobs at a relatively slow pace in August, with ADP reporting a gain of 132,000, the smallest since the beginning of last year.
The jobs report is where policymakers “probably get the highest price tag on where the underlying momentum is,” said Michael Gapen, head of U.S. economics at Bank of America Corp.
And while Friday’s report could be decisive in pushing policymakers toward another 75 basis point hike at the end of their two-day meeting on September 21, there is another big report on the horizon for the central bank to consider: the closely watched CPI .
Minneapolis Fed President Neel Kashkari said in an interview on Bloomberg’s Odd Lots podcast that he will watch the jobs report for signs of what’s going on with wage growth, but emphasized his focus on inflation data when considering the September interest rate move.
“Ultimately, I’m very focused more than anything on inflation data and inflation expectations,” Kashkari said in an interview Monday that aired Thursday. “For me personally, I don’t think the labor market itself is going to be a determinant of 50 versus 75.”
That sentiment was echoed by Atlanta Fed President Rafael Bostic.
“Incoming data — if it clearly shows that inflation has started to slow — may give us reason to pull back from the 75 basis point hikes,” Bostic said in an essay posted on his bank’s website on Tuesday.
(Updates with production data and market reaction.)
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