Why it matters: The state of the labor market affects interest rate policy.
The Federal Reserve is closely monitoring the labor market as it considers interest rate policy. A cold labor market tends to reinforce expectations that the Fed will not increase interest rates further, which rose to a range of 5.25 to 5.5% from nearly zero in March 2022.
The labor market has been surprisingly resilient since the Federal Reserve began raising interest rates in a campaign to tame inflation. But while the labor market shows signs of slowing, so does consumer spending. Many companies told investors that in the last quarter, customers pulled back and spent less on products and more on services and experiences. The Fed’s preferred measure of inflation confirmed that consumer spending slowed in October.
At the same time, investors are increasingly hopeful that the Federal Reserve is done raising interest rates. Jerome Powell, Chairman of the Federal Reserve, recently suggested in a speech that the central bank will leave interest rates steady if data continues to indicate a slowing economy. The 10-year US Treasury yield fell on Tuesday, hitting its lowest level since September, as investors expected lower interest rates in the future.
Declining jobs discourages the Fed from raising interest rates or keeping them high for a long time because such a trend often heralds a recession. “With this evidence emerging that the labor market is slowing significantly, I think this increases the chances that the Fed will finish raising interest rates,” said Julia Pollack, chief economist at ZipRecruiter.
Background: Unemployment and job openings have returned to their previous levels.
Although the job market has slowed, it is still a healthy landscape for workers. The unemployment rate in October rose to nearly 4%, which is in line with pre-pandemic levels.
Job openings reached a record high of more than 12 million in March 2022 and have been trending downward since then. The last time job openings hovered around nine million — where they are now — was in the spring of 2021.
There are still great opportunities for workers. The employment rate remained steady in October despite a decrease in the number of job vacancies.
One difference is that there are fewer layoffs than before the pandemic. Perhaps this reflects decisions made by companies to reduce employee numbers through natural attrition rather than reductions.
“This is probably the biggest sign that we still have a strong economy and a strong job market,” said Sonu Varghese, a strategist at Carson Group, a financial consulting firm.
Although inflation has slowed significantly since the Fed began raising interest rates in March 2022, it remains above the central bank’s target of 2%.
The Fed’s preferred measure of inflation fell to 3 percent in October from a year earlier. But without including food and fuel prices, which are volatile and less sensitive to Fed policy actions, the rate was 3.5 percent.
What’s next: The November jobs report comes on Friday.
The Labor Department is scheduled to release its November jobs report on Friday. Economists expect the unemployment rate to remain at around 4%, with an increase of about 180,000 jobs.
This report will be one of the last information on the state of the labor market before the Fed’s next policy meeting on December 12-13.