A fresh employment report released last Friday, July 5th, showed that unemployment ticked up in June as wage growth cooled, indicating that the labor market is continuing to moderate after years of remarkable strength. This could keep Federal Reserve officials wary as they watch for clues that the job market is on the cusp of cracking.
The Fed’s Approach
Fed policymakers have two main goals: achieving low, stable inflation and a strong labor market. They try to accomplish this by setting interest rates, either leaving them low to bolster the economy or raising them to high levels to weigh on growth. Since early 2022, Fed officials have been using higher rates to battle rapid inflation, focusing more on controlling price increases than on the employment side of their mandate. However, with inflation now cooling markedly, keeping the job market strong has once again become a big priority for central bankers.
Recent Trends in the Job Market
Unemployment has been steadily rising over the past year: June’s 4.1 percent reading was up from 3.6 percent a year earlier. This rate measures people who are actively looking for work but struggling to find it, suggesting that it is not as easy to land a job as it was a year ago. This trend aligns with other data, showing that job openings have come down sharply after spiking in the wake of coronavirus lockdowns. Wage growth has been moderating as well, with average hourly earnings increasing by 3.9 percent from a year earlier in the June data, still solid by historical standards but the lowest reading in years.
Potential Implications for the Labor Market
All of these factors add up to a job market that could be on the verge of cooling more drastically. Fed officials have made it clear that a sudden and notable weakening of the labor market could spur them to cut rates. Although the current slowdown probably falls short of that standard, economists and investors increasingly think that, combined with cooling inflation, the labor market moderation will pave the way for a rate cut as soon as September. Investors, who tend to prefer lower rates, pushed up stocks slightly in early trading on Friday, July 5th.