The Fed’s path to a ‘Goldilocks’ economy just got a little more complicated

As far as jobs reports go, November’s wasn’t exactly what the Federal Reserve was looking for.

A higher-than-expected payrolls number and a hot wage reading that was twice what Wall Street had forecast only add to the delicate tightrope walk the Fed has to navigate.

In normal times, a strong jobs market and surging worker paychecks would be considered high-class problems. But as the central bank seeks to stem persistent and troublesome inflation, this is too much of a good thing.

“The Fed can ill afford to take its foot off the gas at this point for fear that inflation expectations will rebound higher,” wrote Jefferies chief financial economist Aneta Markowska in a post-nonfarm payrolls analysis in line with most of Wall Street Friday. “Wage growth remains consistent with inflation near 4%, and it shows how much more work the Fed still needs to do.”

Payrolls grew by 263,000 in November, well ahead of the 200,000 Dow Jones estimate. Wages rose 0.6% on the month, double the estimate, while 12-month average hourly earnings accelerated 5.1%, above the 4.6% forecast.

All of those things together add up to a prescription of more of the same for the Fed — continued interest rate hikes, even if they’re a bit smaller than the three-quarter percentage point per meeting run the central bank has been on since June.

Little effect from policy moves
The numbers would indicate that 3.75 percentage points worth of rate increases have so far had little impact on labor market conditions.

“We really aren’t seeing the impact of the Fed’s policy on the labor market yet, and that’s concerning if the Fed is viewing job growth as a key indicator for their efforts,” said Elizabeth Crofoot, senior economist at Lightcast, a labor market analytics firm.

Much of the Street analysis after the report was viewed through the prism of comments Fed Chairman Jerome Powell made Wednesday. The central bank chief outlined a set of criteria he was watching for clues about when inflation will come down.

Among them were supply chain issues, housing growth, and labor cost, particularly wages. He also went about setting caveats on a few issues, such as his focus on services inflation minus housing, which he thinks will pull back on its own next year.

“The labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time,” Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.”