[Economics] US Jobs at ‘Inflection Point’ Poses Risks for Powell

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Inflection Point Ever since the Federal Reserve began jacking up interest rates more than two years ago, Chair Jerome Powell made clear that the central bank not only wanted to rein in skyrocketing inflation. It also wanted to restore some balance to a labor market where demand for workers coming out of the pandemic was far outstripping supply.At least on that latter score, Powell seems ready to declare “mission accomplished.” After the Fed held interest rates steady this month for its seventh straight meeting, Powell told reporters that labor market conditions had returned to about where they were on the eve of the pandemic. Thanks in part to a surge in immigration, the rebalancing has occurred without much of a rise in unemployment even as job openings have come down.Now, though, the labor market is reaching what Goldman Sachs Chief Economist Jan Hatzius calls a potential “inflection point,” where a further material softening in demand for workers will hit job holders, not just job openings. That, in turn, could result in a significant rise in unemployment, according to Hatzius. That poses a bit of a dilemma for Powell and the Fed. With inflation still running markedly above the central bank’s 2% target, monetary policymakers are reticent about cutting rates just yet. Indeed, they penciled in just one rate reduction for 2024, according to the median forecast in projections released this month. That’s down from the three cuts in 2024 they foresaw in March. The labor market, meanwhile, is showing some signs of softness. Unemployment rose last month to its highest level in more than two years, though it remains historically low. Continuing claims by workers for unemployment insurance benefits have risen for seven straight weeks and stand just shy of their highest reading since the end of 2021. With the job market back to pre-pandemic levels, the danger is that the incipient weakness could turn into something far worse the longer the Fed keeps credit tight. The Best of Bloomberg Economics Treasury Secretary Janet Yellen said Donald Trump’s proposed tariffs would raise costs for consumers and weigh on American businesses. Chicago Fed President Austan Goolsbee said policymakers will be able to cut interest rates if inflation continues to cool as it did last month. Separately, former St. Louis Fed President James Bullard said he expects the pace of US monetary policy easing to be slow. UK retail sales last month jumped at the strongest pace since January. Meanwhile, The “feel-good factor” UK Prime Minister Rishi Sunak hoped would materialize during his term in office may instead arrive just in time to benefit his opponent, the Labour leader Keir Starmer. Japan’s inflation accelerated on the back of rising energy costs, and key measures of the country’s manufacturing and service activity weakened. Polish policymaker Gabriela Maslowska said that neither interest rate cuts nor hikes could be ruled out. Need-to-Know Research China’s Central Bank Governor Pan Gongsheng gave economists plenty to digest with a big speech on Wednesday that hinted at plans to trade government bonds (though not for QE purposes) and move toward a single policy rate. Macquarie Group’s Chief China Economist Larry Hu also picked up on this line from Pan:

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