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A senior Federal Reserve official has insisted that the hot U.S. job market continues to cool, a sign that last month's higher-than-expected employment numbers are not derailing rate setters' plans to cut borrowing costs this year will do.
Loretta Mester, president of the Cleveland Federal Reserve and one of the officials who votes on interest rates, said last week's jobs report for January showed the job market was “remarkably resilient” – but other indicators pointed to “some softening.” .
“At this point, I expect we will see further moderation in wage growth, with a gradual slowdown in job growth and an increase in the unemployment rate over the year from its very low levels,” she said.
Mester added that her “base case scenario” would be for the Fed to “gradually” lower the federal funds target to 5.5 percent in 2024 from a 23-year high of 5.25 percent.
“If the economy develops as expected, I think we will win [the confidence to cut] later this year, and then we can start cutting rates.”
Mester previously said she supported rate cuts three times this year – in line with the Fed's midpoint forecast in December.
Fed Governor Michelle Bowman, seen as more hawkish, expressed concern Friday that January data provided evidence that the health of the labor market could keep service sector inflation above the central bank's 2 percent target.
January nonfarm payrolls data, a key measure of the U.S. economy's labor market, showed 353,000 jobs were added last month – nearly double the forecast.
The report also showed that the average U.S. worker earned an hourly wage of $34.55 — up 4.5 percent from a year ago.
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While Mester acknowledged that wage growth remained “somewhat above the level consistent with 2 percent inflation,” which is the Fed's target, productivity gains meant these better wage deals could be justified by economic fundamentals.
“Our contacts tell us that, with the exception of the health sector, it is easier to hire new employees than it was a year ago and that they are receiving more applicants per job opening,” she said. She added that workers are also more reluctant to quit their jobs.
Mester cited the employment cost index – seen by many Fed officials as a better indicator of wage deals – which showed annual wage growth fell from 4.75 percent in the first quarter of 2023 to 3.5 percent in the final quarter.
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