In July, the United States saw a return to pre-pandemic levels in several key employment metrics. The Federal Reserve is watching this closely since it signals a slowdown in the labor market and expects it will help decrease inflation without boosting unemployment.
In July, 2.3% of employees on non-farm payrolls left their jobs, according to the Job Openings and Labor Turnover Survey (JOLTS), down from 3% during the pandemic. This is on pace with levels seen in 2018 and 2019, years that had a tight labor market and low inflation, and the lowest since January 2021, when a wave of layoffs occurred.
In April of this year, the hiring rate dropped to its lowest point since April of 2020. The Fed predicts that these two indicators, which point to a softer employment market and lower demand for workers, will contribute to lowering inflation and relieving pressure on wage rises.
The Fed attempted to restrain inflation by hiking interest rates in the past, and policymakers hope this time it will work without leading to a spike in unemployment.
Another positive sign is that the Beveridge curve, which shows how many job openings there are relative to the unemployment rate, has returned to its 2019 levels when low unemployment was accompanied by inflation of approximately 2%.
A drop in consumer confidence, as reported by the Conference Board, may portend future reduced expenditures. Traders who trade contracts tied to the Federal Reserve's interest rates are more confident that the Fed will keep rates stable.
At its meeting in September, the Fed plans to keep the target range for the interest rate at 5.25%-5.50%. The inflation, hiring, and wage figures for August will be taken into consideration for the new economic predictions that will be presented after this meeting.
Solid wage growth and a robust job market have supported arguments that the economy is not slowing down and that further monetary tightening may be needed.
However, economists' opinions on how much unemployment is necessary to reduce inflation vary greatly. Christopher Waller, a member of the Federal Reserve Board of Governors, believes that the Beveridge curve’s return to its pre-pandemic state—with fewer job openings but stable unemployment—could restore equilibrium to the labor market.
The ratio of open positions to unemployed people has remained stable at roughly 1.5 vacancies for every unemployed person. This compares favorably to 2019's 1.2 but falls short of 2022's 2-to-1 high when the Fed first started hiking rates.
While these numbers will likely bring the Fed a sense of relief, interest rates will remain unchanged until it is shown that inflation can reliably get to 2%.
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