US hiring slowdown may push Fed to forego another rate hike

By Ann Saphir

(Reuters) -Federal Reserve policymakers received new evidence on Friday that the labor market is cooling, adding to the case that the U.S. central bank’s recent interest rate hike could be the last of its current tightening cycle.

The Fed has raised rates at 11 of its last 12 policy meetings in its effort to beat back inflation, with a quarter-percentage-point increase on July 26 pushing its benchmark overnight interest rate to the 5.25%-5.50% range.

The tightening campaign has contributed to a slowdown in inflation. The consumer price index rose 3% in June from a year earlier, down from about triple that pace last summer.

Data on Friday showing the U.S. added 187,000 jobs last month, below economists’ expectations in a Reuters poll, may be another sign that the effort is working. The average work week also shrank, an indication of easing labor demand.

“I expected the economy to slow down in a fairly orderly way, and this number 187,000 comes in continuing that pace,” Atlanta Fed President Raphael Bostic told Bloomberg Television.

Other parts of the Labor Department report were less encouraging for Fed policymakers counting on a labor market softening to put more downward pressure on inflation. Average hourly earnings rose 4.4% from a year earlier for the fourth straight month and the unemployment rate edged down to 3.5%.

Chicago Fed President Austan Goolsbee, who has argued that wage growth is a product of high inflation rather than a contributor to it, said Friday’s jobs report was one of several recent data points that show labor supply and demand are coming into better balance.

“We’ve gotten inflation down a fair amount without increasing the unemployment rate,” he told Bloomberg Television, adding that it makes him hopeful the Fed can ease price pressures without causing a recession.

The central bank has not often managed that kind of “soft landing,” but Goolsbee and others have argued the coronavirus pandemic and the policy response it produced were highly unusual, changing consumer behavior and crippling supply chains in ways that caused inflation to surge but which are now beginning to fade.

Traders of contracts tied to the Fed’s policy rate now see less than a 30% chance of another rate hike by the end of this year, down from about a 35% chance before Friday’s jobs report.

“I think overall this still does point to a labor market that is slowly but steadily heading toward a soft landing,” said Daniel Zhao, lead economist at Glassdoor.

There are several more key data releases that will shape Fed policymakers’ views before the next policy meeting in September.

“Officials will want to see the August employment report and the next two inflation monthly readings before deciding whether they can remain on hold or if further rate hikes are required to cool labor demand and inflationary pressures,” wrote Kathy Bostjancic, chief economist at Nationwide.

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