Banking circles in the US expected the US Federal Reserve to maintain its course of raising interest rates as part of its continued efforts to calm the economy and control inflation, while a jobs report for June bolstered the outlook for workers. The market is still strong despite warnings of a recession.
Although positive labor data supports the administration of US President Joe Biden, the rapid increase in the inflation rate worries economic policymakers.
Wages and Employment
The U.S. labor report showed a slight decline in wage increases, but employment and corporate profits remained strong enough to reinforce the view among Federal Reserve officials that the labor market is out of control, with demand for work rising more than available workers. The Federal Reserve is likely to raise interest rates at its next meeting to rein in consumer and business spending and return the economy to balance.
“We’re starting to see the first signs of a recession, and that’s what we need,” Atlanta Federal Reserve President Rafael Bostick told CNBC in an interview, describing the wage data as reassuring. “We are moving in the right direction, but there is still a lot to do,” he added.
Federal Reserve officials began raising interest rates last March from near zero in an effort to raise the cost of borrowing. Last month, interest rates rose by 0.75 percentage points, the largest single increase since 1994. Normally, interest rates would be raised by only a quarter point, but the pace has increased due to the dangerously fast rise in the inflation rate.
While the Federal Reserve said it would discuss a move of 0.5 or 0.75 percentage points at its July 26-27 meeting, officials said they favored a second move of 0.75 percentage points, given the pace and strength of the inflation rate.
The New York Times cited Wall Street experts as warning that the Federal Reserve’s policies could lead to a recession, and a decline in economic growth data, the housing market and factory orders raised concerns that the U.S. is on the brink of deflation.
President Biden celebrated the report last Friday, criticizing opponents who say the economy is too weak, saying “we’re still adding more jobs than any administration in almost 40 years.”
Private sector voices agreed with Biden that the jobs report showed an economy that did not appear to be deteriorating. “Wage growth is high, and the job loss rate is low,” said Nick Bunker, director of economic research at the employment site. “We will see a recession one day, but not now,” he added.
Rapidly rising prices and slowing economic growth have posed a challenge to President Biden, who has shown his sympathy for consumers, but the president’s popularity has declined with rising prices, especially as fuel prices have topped five dollars a gallon in recent months.
Biden has said fighting inflation is his top economic priority. “Times are tough, prices are high, families are facing a cost-of-living crisis, but my economic plan is moving the country in a better direction,” he added.
Unemployment and Employment
As prices add to the misery of consumers at the gas pump and grocery store, the Federal Reserve believes it needs to get inflation under control quickly to put the economy on a healthy, sustainable growth path.
Officials expect unemployment to eventually rise as interest rates rise and the economy weakens, although they believe it will rise slightly, and policymakers at the Federal Reserve believe that employment will gradually decline, but not flood. The economy is in a painful recession.
Federal Reserve officials are watching wage data in particular. Average hourly earnings rose 5.1% through June, up from 5.3% in the previous month. Non-managerial wages increased by 6.4% over the previous year. Although the rate of increase has slowed somewhat, it is still above normal and could keep inflation high if it continues.
“Wages are not primarily responsible for the inflation we’re seeing, but going forward, they will be mainly in the service sector,” Federal Reserve Chairman Jerome Powell said at his press conference last June.
A 0.75 percentage point hike this month would raise interest rates to between 2.25 and 2.5%, and officials have indicated the possibility of borrowing costs rising by another percentage point by the end of the year.
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