Jobs report gives Fed more ammo to keep hiking rates

The economy beat expectations and added 390,000 jobs last month. Additionally, the country’s unemployment rate remained at 3.6%, an ultra-low level that is just about where it was at right before the pandemic started to wreak havoc on the economy more than two years ago.

May was the first month that has reflected both rate hikes the central bank has conducted, and the fact that payrolls came in higher than was forecast gives the Fed ammo to keep pushing rates ever higher, especially after several previous months of positive job gains.

“The strong May figures will only encourage the Federal Reserve to stick to its course of more aggressive monetary tightening, as inflation remains near a 40-year high,” said Andrew Viteritti, the Economist Intelligence Unit’s commerce and regulation lead.

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The last time inflation was this high, Ronald Reagan was president. Consumer prices increased 8.3% in the 12 months ending in April, a slight downward tick from the explosive 8.5% registered the month before but still far beyond the Fed’s 2% target.

The Fed hiked its interest rate target by a quarter of a percentage point in March, the first time it did so in years. It later jacked up rates by half a percentage point last month, a move that is akin to two simultaneous rate hikes and an aggressive tack taken for the first time in more than two decades.

The Fed’s rate-hiking cycle is not likely to abate in the near term given the country’s towering inflation. The markets are pricing in half-point hikes in June and July, essentially akin to four rate hikes in two months

“In essence, one could look at this as permission for the Fed to continue its move towards increasing interest rates. That to me is the big headline,” Brian Marks, executive director of the University of New Haven’s entrepreneurship and innovation program, told the Washington Examiner on Friday.

Some economists are concerned that by hiking interest rates, the Fed will cause the economy to crater into a recession, especially given the magnitude of hikes and how quickly they are being conducted. Still, top central bank officials have indicated that they don’t intend to veer from their course.

Ahead of the Friday job numbers, Lael Brainard, the vice chairwoman of the Fed, dismissed the notion that the central bank will be pausing its hikes out of concern for the labor and stock markets.

“Right now, it’s very hard to see the case for a pause,” she told CNBC this week. “We’ve still got a lot of work to do to get inflation down to our 2% target.”

The statement was of note because Brainard, who was nominated by President Joe Biden, is known for being a bit more dovish than some others on the Fed.

The fact that she suggested there are no pauses on the horizon even before the numbers were released shows just how resolved the central bank is to tame inflation despite the effect doing so might have on other parts of the economy.

Desmond Lachman, a senior fellow at the American Enterprise Institute, said that the new numbers only lend greater credence to Brainard’s argument and bolster the case for aggressive tightening.

“Today’s report doesn’t give the Fed any reason to change what it’s doing. When they meet in a few weeks … you can be sure that they’re going to raise interest rates by 50 basis points and continue with the reduction of the balance sheet,” Lachman told the Washington Examiner.

It is worth noting that unemployment is a lagging indicator, meaning that the report doesn’t capture the true reality of the labor market right now, but rather what it was like in weeks past. That is why economists will continue to be laser-focused on next month’s employment report and on the weekly jobless claim reports.

Inflation has quickly become the No. 1 economic concern and political issue in the U.S.

Republicans have blamed Democrats and the Biden administration for infusing the economy with too much fiscal stimulus, and Democrats have blamed the price increases on supply chain issues and the war in Ukraine. Many economists believe it is a combination of those and other factors.

On Friday, Biden delivered a speech after the job numbers were released in which he touted the strength of the labor market against the backdrop of rising prices. He hinted that the better-than-anticipated jobs numbers offer more support for the Fed in bringing down inflation.

“I know that even with today’s good news, a lot of Americans remain anxious, and I understand the feeling,” Biden said. “Because of the enormous progress we’ve made on the economy, the Americans can tackle inflation from a position of strength.”

Biden tried to emphasize his administration’s focus on the higher prices consumers are facing when he convened a rare White House meeting earlier this week with Fed Chairman Jerome Powell, which also included Treasury Secretary and former Fed Chairwoman Janet Yellen.

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The president also put out an op-ed in which he emphasized the importance of giving the Fed the space and independence it needs to bring down prices through its monetary policy levers.

“My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this,” Biden wrote in the Wall Street Journal. “I have appointed highly qualified people from both parties to lead that institution.”