Does the Jobs Report Mean Another Interest Rate Hike? How Will That Impact the Economy? Today’s long-awaited jobs report has even more than the usual significance for such a report. By indicating that the labor market remains strong, it paves the way for another 75 basis-point interest rate hike at the Federal Reserve’s policy meeting later this month. At the same time, as the midterm election campaign gets into full swing, it bolsters President Biden’s claim that the country is not in the midst of an economic recession even though the economy contracted in the first two quarters of the year.
Breaking Down What the Jobs Report Means
Last week, in his hawkish Jackson Hole speech, Fed Chair Jerome Powell underlined that the Fed’s main policy objective was to reduce inflation. He also insisted that the Fed would stay the course of raising interest rates until the job of bringing down inflation to the Fed’s 2 percent target was done. He expressed particular concern about the strength of the labor market. In his view, we would need a period of below-trend economic growth and softer labor market conditions to bring down inflation.
Today’s job report showing that the economy added 315,000 jobs in August, together with other labor market indicators, suggest that we are very far from the soft labor market conditions that the Fed is seeking to slay the inflation beast. Unemployment remains close to a fifty-year low, wages are rising at too rapid a pace for comfort, and the economy keeps adding jobs. Equally problematic for the Fed is the fact that not only are job openings at a record high of more than 11 million. Job openings now remain around double the number of people who are unemployed.
The continued strength in the labor market, coupled with inflation still running at a multiple of the Fed’s target, makes it all too likely that the Fed will raise interest rates by another 75 basis points at its September 21-22 policy meeting. However, that is not to say that another significant interest rate hike will be the right policy decision.
Will The Fed Be Too Aggressive?
Indeed, a strong argument can be made that the Fed is being overly aggressive in its quest to regain control over inflation and that it would be better served by a slower pace of monetary policy tightening. Not only does the Fed seem to forget that monetary policy operates with long lags and that its earlier aggressive tightening is yet to have its full impact on the economy. The Fed also seems to be forgetting the impact that its policies are having on the rest of the world economy and on global financial markets.
The one way in which the Fed’s hawkish monetary policy is adversely affecting the rest of the world economy is by aggravating the inflation problem abroad. It is doing so by propelling the dollar to a 20-year high thereby increasing the rest of the world’s import costs. Another way the Fed’s higher interest rates are having a negative impact is by sucking capital out of the rest of the world at an accelerating pace. That induces the World Bank to warn that we could be on the cusp of a wave of emerging market debt defaults.
Fortunately for President Biden, the full impact of today’s hawkish Fed monetary policy stance both at home and abroad will most likely only be fully felt after November’s midterm elections. Especially after today’s solid labor market report that will allow Mr. Biden to claim that the economy is strong. It will also allow him to hope that the electorate will not focus on the fact that inflation reached a forty-year high in no small measure due to his reckless budget policy.
Author Biography and Expertise: Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
