Live updates on the March jobs report: 303,000 new jobs were created in the US, exceeding expectations

Federal Reserve officials spent much of 2022 and 2023 worried that the labor market was too strong to be sustainable. The logic was that employers struggled to grab a limited supply of workers, leading to rapid wage increases that eventually led these companies to raise prices to cover their labor costs.

But rather than viewing rapid employment growth as a potentially inflationary problem, the Fed has recently addressed it.

The reason for this is that strong hiring is accompanied by a significant increase in the labor supply. Immigration has been much stronger than expected, and Millennial men and women in particular are entering the workforce, allowing companies to hire employees without having to compete too harshly for workers. Wage growth, while strong, was not catastrophic, and inflation cooled in a range of purchases, including service categories that are typically sensitive to labor costs.

Data released Friday showed that many of these trends are continuing. Hiring was very high in March and wages rose sharply, but continued to decline slightly year-on-year. Average hourly wages rose 4.1 percent last month compared to a year earlier, down slightly from 4.3 percent in February.

Overall labor force participation increased slightly, meaning a larger share of adults were working or looking for work, and employment among foreign-born workers continued to increase – an indication that immigrants may be responsible for some of the robust job growth.

The question now is how long policymakers will remain willing to tolerate such strong hiring without fear that it will lead to renewed increases in consumer demand, economic growth and inflation. March's job growth is faster than what most economists consider sustainable, even when increasing labor supply is taken into account.

But in recent speeches, central bankers have primarily expressed their satisfaction with the good labor market situation.

The labor market is “strong, but it is rebalancing,” Fed Chairman Jerome H. Powell said in a speech this week. He noted that job openings have declined and that employers reported in surveys an easier job search.

A balanced but robust labor market is good news for the Fed. If companies can find workers, it means the economy can grow solidly without overheating and high inflation. And that means the Fed can put a little pressure on the economy with higher interest rates — something it does to control inflation — without hitting the brakes.

In fact, the recent surprise surge in labor supply is a big reason the central bank could achieve a “soft landing,” where it shakes up the labor market gently without triggering a painful recession. Mr. Powell pointed out this week that immigration was a big reason the economy beat forecasters' growth expectations last year without generating inflation.

In fact, price increases cooled from 6.4 percent at the start of the year to 3.3 percent at year's end, even as consumer spending consistently exceeded forecasts.

“Our economy has been hit by labor shortages and probably still is,” Powell said, but immigration “explains what we've been asking ourselves, which is, 'How can the economy grow in a year when almost all… over three percent.' have grown by over 3 percent?' Did an outside economist predict a recession?'”

Still, the current pace of job growth is strong even when accounting for rapid immigration, which could worry Fed officials that the economy is still at risk of overheating if hiring continues at this pace.

Economists say job growth can remain strong without causing the economy to overheat as immigration increases the labor supply. A Brookings Institution analysis recently estimated that employers could add 160,000 to 200,000 jobs per month this year without much risk of wage increases and a rise in inflation. Without all immigration, that would have been closer to 60,000 to 100,000.

And some Fed officials have already questioned whether the central bank should cut interest rates at a time when inflation is proving stubborn and the economy looks like it's rebounding.

Fed policymakers have been hinting for months that they could soon cut borrowing costs, currently at about 5.3 percent. But as inflation has reached a sticking point after months of slowing, investors have steadily scaled back their expectations of when that might happen and now expect the first move not to happen until June or July.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, even suggested this week that it might make sense to keep interest rates at current high levels all year long if price increases stall. While Mr. Kashkari does not vote on policy in 2024, he sits at the discussion table during tariff-setting meetings.

“If inflation continues to move sideways, I would question whether we even need to do these rate cuts,” Mr. Kashkari said in an interview with Pensions & Investments, noting that the economy “has a lot of momentum.” .”