- Key insight: A surprisingly strong jobs report bolsters the argument for the Federal Reserve to raise rates later this month, but much will depend on next week's consumer price index inflation report.
- Expert quote: "With economic activity and the labor market in good shape, they are not a large factor in my determination of the appropriate setting of monetary policy. But they are an important backdrop for the part of the outlook that is my focus right now, inflation, and my judgment about how much the current stance of policy is working to return inflation to 2%." — Federal Reserve Gov. Christopher Waller
- Forward Look: The August consumer price index, set to be released on Sept. 11, will determine the Federal Open Market Committee's next move.
Hiring in the U.S. got back on track in August, with employers adding 162,000 workers to their payrolls in August. The unemployment rate was unchanged at 4.1%.
Friday's surprisingly strong reading on the labor market by the Bureau of Labor Statistics underscores the overall strength of the economy and keeps the Federal Reserve's focus squarely on inflation as it weighs whether to raise interest rates during its next monetary policy meeting later this month.
The bump in hiring far exceeded market expectations, with forecasts projecting just 65,000 hires from the month and a slight uptick in the unemployment rate from 4.1% to 4.2%. The BLS report comes after a surprise net decline of 23,000 jobs in July.
In Friday's report, the bureau also revised its July figure from a net loss of 23,000 to a gain of 21,000 and also added another 11,000 jobs to its June tally. Overall, the economy has added more than 200,000 jobs during the past three months, the report said.
Yet, policymakers at the Fed have been unconcerned about this tepid labor market activity, chalking it up to demographic trends, such as an increase in retirements and a lack of growth due to immigration restrictions.
"When labor supply is barely growing, monthly job gains are naturally going to run low," Fed Chair Kevin Warsh said in a speech last week. "There are always areas of concern in the labor market — for example, among recent graduates. In general, though, people who want to work, by and large, are holding or finding jobs."
In his own speech Thursday morning, Fed Gov. Christopher Waller described the labor market as being in "satisfactory shape."
Earlier this year, Waller said the low hire-low fire stasis among employers has made the labor market vulnerable to shocks and layoffs. But, for now, he said the employment situation is not a driving factor in his assessment of the appropriate stance of monetary policy.
"With economic activity and the labor market in good shape, they are not a large factor in my determination of the appropriate setting of monetary policy," he said. "But they are an important backdrop for the part of the outlook that is my focus right now, inflation, and my judgment about how much the current stance of policy is working to return inflation to 2%."
Like other Fed officials, Waller said he would be willing to hold interest rates steady if inflation continued to inch toward the central bank's target or raise them if price growth accelerates.
Fed Gov. Michael Barr outlined a similar reaction function during a speech earlier this week.
"If trends in the data give me some confidence that inflation is moderating on a path to 2 percent, then I think we can take a bit more time to assess our policy stance," Barr said. "However, if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates."
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Opinions have been split among Federal Open Market Committee members about the trajectory of inflation and the wisdom of raising rates. In an appearance on CNBC this week, Federal Reserve Bank of New York President John Williams — a permanent member of the FOMC — took a more sanguine view of the inflation picture, noting that markets continue to expect inflation to return to 2% over the long-term.
Williams also said he sees inflation trending in a positive direction, though he stopped short of endorsing a rate hold to allow that process to play out. He said he wants to see the data on August inflation, which is due out next week.
"I am actually seeing the trend in inflation moving slowly down as some of the effects of the tariffs kind of move into the rearview mirror," he said. "But we have to be data dependent; got to keep watching that data."
Yet, other FOMC participants have less optimistic inflation outlooks. Federal Reserve Bank of Cleveland President Beth Hammack, one of three committee members to vote in favor of a hike in July, has continued to beat the drum for tighter monetary policy.
"I don't want to prejudge anything. But I believe now is the time to act," Hammack said. "I believe that we've been in an inflationary situation for more than five years. It's been running well above our target. I don't see any restriction in policy when I look at financial conditions and when I talk to market participants."
