Will a Cooling Labor Market Translate to Cooling Interest Rates?

September 5, 2023

The area of the economy making the Fed’s mission of engineering a ‘soft landing’ difficult is the strong labor market. However, recent data show the labor market may finally be cooling off. This is a welcome sign for the Federal Reserve and the markets. Let’s digest last week’s labor data.

JOLTS

Last Tuesday, the Labor Department released the Job Openings and Labor Turnover Survey (JOLTS) for the month of July. It showed job openings fell to 8.8 million, below the 9.5 million economists’ expected. This is the lowest job openings since March 2021. The underlying trends of the report were encouraging for the Fed as well. The number of unemployed workers to job openings are down to 1.5:1, down from its 2:1 peak last year. In addition, job quits continue their downward trend. Job openings are trending in the direction policymakers desire but still remain well above pre-COVID levels.

Payrolls and Unemployment

Friday was ‘Jobs Day’. This is when payroll data is released on the U.S. economy for the prior month. It is closely monitored by economists, investors, analysts and, most importantly, the Fed. Why? Maximum employment is one of its dual mandates for monetary policy.

The nonfarm payrolls showed 187,000 jobs were added in the month of August. This was above expectations yet the prior month’s reading was revised lower. The unemployment rate unexpectedly rose from 3.5% to 3.8%. This was a result of the labor force participation rate increasing as more workers entered the labor force. This is exactly what the Fed wants to see. More people looking for work not only reduces the numbers of job openings but also helps to alleviate wage pressures. This is essential for the Fed to be able to achieve its 2% inflation target.

Looking Ahead

This is the last of the labor market data before the Federal Reserve’s policy meeting later this month. The expectation for that meeting is no rate increases. The question still on everyone’s mind is if the Fed is done raising rates for this tightening cycle. As part of its upcoming policy meeting, we will receive updated interest rate projections to see if the Fed still sees another 0.25% of tightening between now and the end of the year. Stay tuned!

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