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Analyzing Jobs Data to Gauge Economic Progress: Fed Officials

Federal Reserve officials are likely to closely watch employment numbers on Friday for further signs that the economy’s momentum is slowing, an important consideration for them in deciding whether to lift interest rates further.

Fed policymakers have sharply increased borrowing costs over the past year and a half, to a range of 5.25 to 5.5 percent, from near-zero as recently as March 2022. Those moves were meant to slow the economy by making it more expensive to borrow to buy a house, purchase a car or expand a business.

Now, central bankers are contemplating whether they need to raise interest rates one more time. Policymakers had previously forecast another move before the end of 2023.

Most investors do not expect any increase to come at the Fed’s next meeting on Sept. 19-20, but officials have not ruled out a move. And even if central bankers leave rates unchanged in September as markets expect, policymakers will release a fresh set of economic projections showing how they expect the labor market, inflation and interest rates to shape up over coming months and years.

That’s where incoming data reports — including the fresh jobs figures — could matter. Employers have been hiring at a surprisingly steady pace this year, given the recent interest rate increases. Policymakers will be assessing whether this trend of steady job growth continues.

Additionally, Fed officials will pay close attention to the rate at which wages are increasing.

In recent months, central bankers have downplayed wage gains as a potential cause of inflation, suggesting instead that rapid wage growth is likely a result of workers trying to catch up with past inflation. However, economic models indicate that steep wage growth could make it difficult to control inflation. Companies facing higher labor costs may increase their prices to protect profits, and workers with higher wages may be willing and able to pay higher prices.

Jerome H. Powell, the Fed chair, recently highlighted the slowdown in job growth, stable hours worked, and decreasing wage gains as indications that the labor market is achieving a better balance.

“We expect this labor market rebalancing to continue,” he said, speaking last week in Wyoming. However, he cautioned that the Fed is monitoring the possibility of the economy heating up again despite the higher interest rates, which may necessitate further increases in borrowing costs.

“Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response,” said Mr. Powell.

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