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Tighter labor markets mean less money

In a pandemic, things change quickly. And a rapidly changing economy is making the Federal Reserve catch up.

  • Less than a month ago, the Fed made an abrupt move towards a more restrictive monetary policy stance. Late last week, the data indicated an even faster withdrawal of the stimulus.

Why it matters: Cheap money is baked into the economy, so the Fed’s moves to take it away risk abrupt swings in markets that could spill over into the economy again.

According to the numbers: Friday’s labor market data is Figure A. While the opening headlines focused on weak payroll growth, the report points to an exceptionally tight labor market, which is contributing to already high inflation.

  • The unemployment rate has fallen to 3.9%. In the last economic cycle, this level was only reached in May 2018 – at which point the Fed had already raised interest rates six times (now: zero).
  • Wages are not only rising, but faster and faster. The average hourly wage increased 4.7% throughout 2021, but increased 6.2% per year in the last three months of the year.

Between the lines: An easy way to look at monthly job numbers is to see if employers have many jobs on their payroll (good!) Or not (bad!).

But which numbers are most important depends on the economic moment. For example, employment growth numbers are usually useful for identifying when the economy is falling into recession.

  • Now that inflation concerns are paramount, indicators of labor tightness – such as the unemployment rate – are the most likely to attract the Fed’s attention.
  • Wide levels of underemployment (known as U-6) have also almost returned to pre-pandemic levels. It fell to 7.3% in December, compared to 7% in February 2020.

What you say: “No matter how you slice the data, it’s hard to avoid the conclusion that the job market is very tight,” JPMorgan’s Michael Feroli wrote in a note.

  • The futures markets agree with CME Group and are now pricing in a 70% chance of a rate hike in March, up from 36% in early December.

Yes but: While the labor market is recovering rapidly overall, the improvement is not uniform. The unemployment rate among black Americans rose as much as 0.6 percentage points to 7.1% in December – and Fed leaders have declared that they want broad and inclusive prosperity.

The bottom line: The job market has become tighter, faster than most people, including at the Fed, would have thought possible just a few months ago. Politicians are now well on their way to following suit.

Go deeper: Record minimum wage increases in states

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