The U.S. Job Market: October Surge Surprises Economists, Shakes Fed’s Plans

The U.S. job market experienced a pulse of hiring in October, yet solid wage growth and more newcomers encouraged workers to jump back into the job hunt last month, according to a report Friday. Inflation (rising prices) is the side dish for monetary policy, given it interferes with the pricing of assets and wages—especially since wage growth has not been commensurate with jobs growth.

Better Than Expected Job Market

Economists were forecasting only meager job gains, in part because of persistent worries about higher inflation, which has led the Federal Reserve to raise interest rates several times to try to cool the economy. But the recent addition of 254,000 new jobs came as a surprise to everyone, squirreling away cash and signaling extreme but unsuspected strength in the U.S. labor market!

The new snapshot of hiring data covers a variety of sectors where the job gains were strong, especially in healthcare, professional services, and leisure and hospitality. The human toll for companies comes even as hiring picks up after the unemployment rate has dropped, and worker confidence is holding, as businesses are expanding in spite of higher borrowing costs.

How Does This Affect the Federal Reserve?

The Federal Reserve is tightening borrowing costs to fight inflation—continued rapid consumer demand, higher prices, and increased spending are key concerns. But these robust job gains get in the way of that effort. In fact, by putting more people to work, this could increase consumer spending, leading to added demand and further driving inflation higher.

Federal Reserve officials are now in a tough spot: Do they lift interest rates more aggressively to bring inflation down, or do they take a breather as the U.S. jobs market shows signs of healing unexpectedly quickly?

Meanwhile, another economist notes that while job growth usually indicates a booming economy, it can also work against inflation. The Fed will have to walk a fine line, as it seeks to tame inflation without tipping the economy into a recession.

Effects on Wages and Inflation

Competition among employers to fill roles is also increasing wages, good news for workers but potentially complicating the Fed’s path even more. More disposable income from higher wages can result in inflation as consumers spend more and companies increase prices to compensate them—this is known as wage-push inflation.

The spike could also show that businesses are in no mood to ignore the economy’s direction, even if borrowing costs are on their way higher. But that confidence, plus an increase in wages, could make it harder for the Fed to nudge inflation back down toward its target of around 2 percent.

What Happens Next?

With the labor market outperforming estimates again, attention now shifts to the Federal Reserve. Is the Fed going to raise interest rates more aggressively to offset inflationary pressure, or will they continue to respond slowly in an attempt not to stall job growth?

Accordingly, the evolution of the economy in the coming months will likely be significant. If inflation remains elevated, the Fed may be compelled to raise rates again, which could prompt a deceleration in economic activity that might ultimately impact the job market. In contrast, should inflation begin to moderate or cool down, the Fed could decide to pause and allow more growth in the economy by holding off on further rate hikes.

That would now appear to be the case because suddenly the job market is accelerating, something that has thrown a monkey wrench into the Fed’s plans. The task in the year ahead will be how to calibrate a job-expanding monetary setting to deliver inflation at lower levels without adding to—or intensifying—such risks.

Conclusion

America now has 254,000 people that it wasn’t expecting to employ, which presents the American economy with a range of positives and negatives. While healthy employment expansion is generally positive, it also creates a headache for the Federal Reserve as it tries to curb inflation. The central bank now has to steer through uncharted waters meticulously, altering policies as needed to keep the economy on course for a safe and substantial recovery.