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Goldilocks Jobs Report Boosts Fed Slowdown Hopes

Goldilocks Jobs Report Boosts Fed Slowdown Hopes

November 07, 2022

The U.S. Labor Departments nonfarm payrolls report released today showed encouraging signs for the Federal Reserve (Fed) that a “soft landing” for the economy may still be achievable. Markets responded positively to the report data that showed a cooling of the still hot jobs, market which could give the Fed cover to slow the pace of rate hikes.

The report showed the economy likely added 261,000 payroll jobs in October, the slowest monthly gain since December 2020 when the economy outright shed jobs, though above consensus of 200,000. The October unemployment rate also rose from 3.5% to 3.7% the prior month. This brings the unemployment rate back to where it was in August and was above consensus estimate of 3.6%.

As shown in the LPL Research chart of the day, both the three- and six-month moving averages decreased in October as the labor market cooled. The orderly decline in the longer-run averages is the not-too-hot, not-too-cold “Goldilocks” scenario the Fed seeks.

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One of the challenges that has been fueling wage inflation is the tightness of the labor market; for every unemployed individual there are almost two job openings. In October the job opening rate rose to 10.7 million and there were 4.1 million unemployed workers leading to an uptick in this ratio. This could be attributable to an increase in temporary work or part-time work. The tightness of the market is also keeping the quits rate (the percentage employees who voluntarily leave their jobs) at historically high levels.

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The U.S. economy saw a large number of participants leave the job market as COVID-19 first hit. Subsequent job additions have now brought the economy back to the pre-pandemic level but it’s still far below the pre-pandemic trend. This suggests that the labor market could loosen in the coming months if more re-enter the workforce. The high inflationary environment should eventually bring people back into the workforce who had taken an early retirement during the pandemic, as their purchasing power of savings is eroded.

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The latest jobs report will not likely change the current path of Fed tightening, since current inflation pressures have not convincingly eased enough for policy makers, but it will reassure them that they are on the right (but narrow) path toward a “soft landing”. As such, we still expect a 0.5% fed funds rate hike at the Fed’s December meeting.



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