Written by Howard Schneider and Ann Saffer

NEW ORLEANS/SAN FRANCISCO (Reuters) – A jump in the workforce and moderation in wage growth suggests that the U.S. labor market is starting to move the way the Federal Reserve had hoped, to better balance supply and demand for workers and their help. in its fight against inflation.

After a year in which many key measures of the jobs market stalled at levels the US central bank feels are incompatible with stable prices, December employment data published on Friday provided a hint of relief.

Nearly 165 million people were either in or looking for jobs last month, a record number that showed a long overdue improvement in the labor supply. American companies added 223,000 jobs to the payroll to cap a year in which 4.5 million people were employed, a total that was only surpassed in the post-World War II era by 2021 by 6.7 million.

At the same time, hourly wages — the price of labor — grew at the slowest annual pace in 16 months and fell by a full percentage point since the end of the first quarter of 2022. Average weekly earnings gained 3.1%, the slowest pace since May 2021.

Average hourly earnings growth: https://www.reuters.com/graphics/USA-FED/JOBS/myvmnzoaapr/chart.png

said Simona Mokota, chief economist at the company State Street (NYSE: Global Advisors).

“In this case, you can have your cake and eat it too,” she added, with earnings growing with no collapse in labor demand or large-scale layoffs.

Ideally, she said, that should allow the Fed to slow down and quickly pause interest rate hikes.

Employment Recovery by Race: https://www.reuters.com/graphics/USA-ECONOMY/UNEMPLOYMENT/znvnexbyepl/chart.png

Traders took the report as evidence that the Fed’s work is nearing completion. US stocks rose and interest rate futures traders increased bets that the Federal Reserve will slow the pace of interest rate hikes further in the January-February 31st period. First meeting and finally stopping in the 5.00%-5.25% policy rate range that almost all US central bankers have indicated they believe will be needed to stop inflation.

“very, very high”

However, Fed policymakers were more sober about Friday’s data, suggesting that they are trapped in further rate hikes and will want to see more data confirming easing of price pressures before they stop tightening.

Atlanta Federal Reserve Chairman Raphael Bostick said Friday that he expects the policy rate this year to reach the range above 5.00% that he and his colleagues indicated last month and to stay there until “good” through 2024.

This is a stark contrast to traders’ expectations for the policy rate, now in the 4.25%-4.50% range, to reach 4.75%-5.00% and then for the Fed to start cutting borrowing costs in the second half of this year.

“Today I would be comfortable with either 50 or 25 (a basis point increase),” Bostic told CNBC, referring to the Fed’s upcoming rate-setting decision. “If I start to hear signs that the labor market is starting to soften a little bit in terms of its tightness, I might move more towards the 25 basis point position,” he said, adding that at this point he doesn’t. You see wages as driving inflation.

Minutes of last month’s policy meeting, which were released this week, reflected the Fed’s concern about how the labor market will affect its fight against inflation, with officials concerned that core components of inflation “are likely to remain persistently high if the labor market remains extremely tight.”

The US unemployment rate fell to a pre-pandemic low of 3.5% in December.

Unemployment rate: https://www.reuters.com/graphics/USA-ECONOMY/UNEMPLOYMENT/gdpzymqoqvw/chart.png

Although the employment data reflects only one month, it provided a welcome relief in some of those dynamics that have so badly weighed on officials’ minds as they try to continue to reduce inflation, which was running at the highest rate in 40 years in the middle of last year.

According to the Fed’s preferred measure, the personal consumption expenditures price index, inflation rose at an annual rate of 5.5% in November, down from earlier in 2022 but still more than double the central bank’s 2% target.

The Fed pulled out all the stops last year in its attempt to crush inflation, raising the benchmark interest rate from nearly zero in March to the current level in the fastest series of rate hikes in more than a generation.

More inflation data due next week will play into the Fed’s calculations about where it should go in the coming months, with the Labor Department’s Consumer Price Index expected to show that price pressures eased further in December. The annualized CPI rate is expected to drop to a 14-month low of 6.5% in December from 7.1% in the previous month, and the monthly rate is expected to remain unchanged, a surprising turnaround in a measure that was running at its highest rate since Early 80’s just six months ago.

“We’ve seen inflationary dynamics in the United States slow significantly,” Robin Brooks, chief economist at the Institute of International Finance, said Friday at the annual meeting of the American Economic Association (AEA) in New Orleans. “This is a very real development. And it has continued in one form or another.”

“This is really good news.”

That may be true, but Fed officials — caught in their early reaction to rising inflation — are far from sounding victory bells.

“Recent data suggests that employment compensation growth has really begun to slow somewhat over the past year,” Fed Governor Lisa Cook said at the AEA meeting.

She said however, “Inflation remains very high, despite some encouraging signs recently, and therefore is a major concern.”