Strong Employment Means High Interest Rates for Longer
By Michael Bright
A blowout jobs report would usually be a good sign for a nation’s economy. But the U.S. jobs report that came out earlier this month increased fears that interest rates will remain elevated for longer than had been expected.
The Labor Department reported that nonfarm payrolls surged by 336,000 jobs last month, surpassing expectations. The implications also are outsized.
Economists had predicted a more modest addition of 170,000 jobs, half the actual number. The unemployment rate has been below 4 percent since December 2021, a stretch not achieved since the late 1960s. But in this case, a robust job market is both a cause for celebration and a harbinger of challenges. Booming employment comes with fears of an overheated economy.
The Federal Reserve has been trying to cool the economy down – and in that way reduce inflation – by raising interest rates. The stronger-than-expected job growth isn’t making their task easier. The Fed will now have to consider keeping interest rates high for an extended period to meet its inflation targets. Rates already are at a 22-year high.
At the same time, interest rates on mortgages, credit cards and the like probably will continue to increase. Worries about a possible recession have put long-term interest rates lower than the short-term rate set by the Federal Reserve for much of the last year. That’s the opposite of what usually happens. Normally, the longer the term of a loan the higher is its interest rate because of uncertainty over such an extended period.
The strong jobs report among other economic factors have made it less likely that the U.S. economy will fall into recession, so a more normal situation is happening with rates. In other words, the good news that a recession probably isn’t coming means bad news for interest rates paid by consumers. They are high and could go even higher.
To be clear, average hourly earnings rose by just 0.2 percent from the previous month, a sign of moderating inflation, which is the Fed’s goal. It also is proof of the pressure a wide swath of America has been feeling on consumer incomes and corporate profits.
Sustained, higher interest rates produce real discomfort for American consumers and businesses even as they push inflation down. The jobs report portends continued pain for a Federal Reserve determined to restrain price inflation.
Securitization Benefits Americans by Reducing Risk and Interest RatesDecember 2023
Consumers Defy Economists’ OptimismNovember 2023
Recent Trends in U.S. Home Prices and Mortgage Interest RatesNovember 2023
Stop the Government Debt and Spending SpiralNovember 2023
Mortgage Rates: A PrimerOctober 2023