Oops! An Awkward Jobs Report for the Fed
The Federal Reserve said the case for raising rates had weakened. Then came the jobs report.
By Justin Lahart
A key manufacturing index bounced back in January. Photo: eric johnson/Reuters
The Federal Reserve just told us it isn’t planning any more rate increases. The job market may have something to say about that.
The Labor Department on Friday said that the economy added 304,000 jobs in January — far more than the 170,000 than economists expected. Even with the caveat that employment growth over the previous two months was lowered by a net 70,000 jobs, that counts as a big surprise.
The government shutdown was on, after all, and it is likely that government contractors’ temporary layoffs depressed the payroll count. It did help lift the unemployment rate to 4% from 3.9%, the Labor Department said — a move that seems likely to reverse itself now that the shutdown is over.
The strength in the job market stands in contrast to survey-based reports that have been flashing warning signs on the economy. It is beginning to look as if those measures were sending a false signal: On Friday, the Institute for Supply Management reported that its manufacturing index, which had registered an unexpectedly large drop in December, rebounded last month.
This suggests that recent signs the economy is weakening have been driven more by a temporary decline in confidence than anything concrete. Of course there could still be trouble lurking — employment is a lagging economic indicator so it may not reflect the reality of what is happening on the ground. Another couple more months of jobs strength would extinguish any doubt, though.
The way Fed Chairman Jerome Powellframed it on Wednesday, the data will have to give the central bank a reason to raise rates — an economy that is doing fine and a notion that the appropriate level of rates is higher isn’t enough. As long as inflation stays contained and asset markets don’t start getting bubbly, that gives the Fed some latitude to stay on hold.
But if the recent pace of job growth continues, the unemployment rate will start pushing lower again, while wage growth will keep drifting higher. So long as the economy is able to get past some of its near-term challenges, such as the possibility of another government shutdown later this month, it could get much harder for the Fed to stand pat.
Mr. Powell may find that the unexpectedly dovish message on rates he delivered this week was a mistake that could prove difficult to get out of.
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