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Big US jobs gains give the Fed a lot more work to do to get inflation under control

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The Federal Reserve will face more urgency in its fight to cool the US economy with sharp interest rate hikes after the latest batch of labor market data showed an unexpected acceleration in earnings. jobs and strong wage growth.

Figures released on Friday allayed fears that the US economy is either slowing sharply or already in recession after two straight quarters of contracting output this year. However, it will increase fears that high inflation could take hold as wages continue to rise, requiring even more central bank intervention.

The Fed has already raised its main interest rate from the lows of the coronavirus pandemic to a target range of 2.25% to 2.5% this year, including two consecutive increases of 0.75 percentage points. in June and July.

On the back of the latest jobs report, economists and Fed watchers say the likelihood of another aggressive move higher next month has increased, although the central bank will still be watching economic data closely. forthcoming, including inflation figures due next week.

Today’s numbers should allay recession fears but amplify fears that the Fed still has a lot of work to do, and we now think a 75 basis point hike in September looks likely. The inflation worries that drive the Fed will only be exacerbated by this jobs report, wrote Michael Feroli, senior economist at JPMorgan, in a note Friday.

Jobs have not slowed at all in response to the Federal Reserve tightening. This is a double-edged sword, added Michael Gapen, chief US economist at Bank of America, noting that while the likelihood of a short-term recession is lower, the risk of a hard landing increases. .

David Mericle, chief US economist at Goldman Sachs, said the report removed some ambiguity about the strength of wage growth in the US economy, suggesting it was not slowing as much as the Fed might hope. .

The general message is that wage growth is moving sideways at a pace that is likely a few percentage points higher than would be consistent with 2% inflation, which is the Fed’s long-standing inflation target, did he declare. The Fed has more to do than we thought before today.

Fed Chairman Jay Powell is expected to deliver his latest thoughts on the trajectory of U.S. interest rates and central banks’ strategy for reducing inflation at the annual conference in Jackson Hole, Wyoming, scheduled for late August.

At his last press conference in July, Powell said another unusually large interest rate hike in September might be appropriate, but that decision has not been made.

It’s the one doing well based on the data we see. And were going to make decisions meeting by meeting, he added.

Movements in financial markets could also be a factor in the Fed’s next step. Traders began heeding expectations for interest rate hikes after the jobs data, predicting rates will peak in March at 3.64%, up from 3.46% expected before the report. Fed funds futures show the odds of a 0.75 percentage point increase in September rose to 67% from 33% on Thursday.

As the high jobs count increases pressure on the Fed, it has been welcomed by the Biden administration as it means a sharp economic downturn is less likely ahead of November’s midterm elections.

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It comes as Congress prepares to vote on a $700 billion package of measures aimed at curbing inflation by raising taxes on big business, lowering the cost of prescription drugs and cutting the budget deficit, even whether it would also increase spending on clean energy incentives in order to combat climate change.

This bill is a game changer for working families and our economy. I look forward to seeing the Senate pass this legislation and pass it as soon as possible, Biden said Friday.

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