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Jobs and Fed Rate Hikes Could be Clues to Consumer Spending: Week Ahead

An unemployment rate of 3.9 percent could bring the Federal Reserve closer to a Fed rate increase in March.

Whether the Fed will move to tighten could depend largely on the January nonfarm payroll report from the Labor Department coming out in February. The Fed is also more than likely keeping an eye on Omicron and its potential impact on the jobs front.

“In June 2021, six months ago, the unemployment rate was two full percentage points higher, at 5.9 percent,” Gad Levanon, head of The Conference Board’s Labor Market Institute, said. He speculated that the large drop in the unemployment rate might reflect a higher proportion of unemployed people landing jobs now that enhanced unemployment benefits have expired.

Levanon also said that wage inflation suggests that the U.S. labor market is still experiencing severe labor shortages. But while the labor force participation is showing gradual signs of improvement, he said some people could still be delaying re-entry into the labor market due to fears of Covid-19.

“In the near term, the exponential spread of the Omicron variant is likely to temporarily lower the supply of labor, as many workers will be sick or quarantined. Employers may resort to temporary help agencies to fill the gaps,” Levanon said. “By March or April, we expect strong job growth to resume. Employment in many of the in-person services industries are still well below pre-pandemic levels and are likely to grow rapidly in 2022. The U.S. unemployment rate may well reach 3 percent this year, marking a 70-year low. Severe labor shortages will continue.”

While rising inflation is one factor for the Fed to consider in terms of whether to raise interest rates to dampen the surge in prices, it’s really the labor market that will drive the decision. That’s because the Federal Reserve has a dual mandate from Congress. One is to maintain price stability. The other is to ensure maximum employment. And a jobs front where worker shortages are the norm is an indication of a strengthening labor market. That, in turn, is one sign that the economy is humming again and the Fed can begin to pull back on policy support.

In fact, Fed Chair Jerome Powell said last month that there’s been “rapid progress” towards the Fed target of “maximum employment.” He made those comments at a news conference after the Fed’s decision on tapering and leaving interest rates unchanged. He also said economic activity is on track to expand at a robust pace.

And with the unemployment rate down to 3.9 percent along with average hourly earnings up 0.6 percent, Wells Fargo economists believe that a Fed rate increase in March is very much a possibility. They also noted in an economics update on Friday that a 3.9 percent unemployment rate “puts it at the lower end of the Fed’s estimated range of what constitutes ‘normal.'” They believe that even if the Fed takes a pass in March, “rate hikes seem all but certain shortly thereafter.”

Any rate increase could influence consumer and business loans, and credit card rates. While some may think higher rates could depress discretionary spending at retail, the actual impact on consumers isn’t so clear. Some thought the rise in the Omicron virus over the Thanksgiving weekend would put a damper on holiday spending, yet consumers adapted. Consumer confidence improved in December, and brisk apparel sales helped drive 8.5 percent retail growth during the holiday season, according to Mastercard data.

 

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