The strong labor market is becoming its own worst enemy


America’s massive labor market boom may help fuel its own unraveling.

The U.S. economy added a robust 311,000 jobs in February, building on momentum from the previous month and reversing months of slowdown in 2022, new figures from the Labor Department showed. But this blockbuster growth is also fueling fears that a persistently warm labor market could make it that much harder — and more painful — to bring down inflation.

“At this point, the flow of good news feels like an apocalypse overdue,” said Aaron Terrazas, chief economist at Glassdoor. “There’s a lot of anxiety (among business leaders) that this report means that interest rates will rise, making it more expensive to borrow, which will shut down consumption and investment. There’s a sense that this is just kicking the can.” further down the line.”

A recent spate of strong economic news could prompt the Federal Reserve to raise interest rates even more aggressively, increasing the chances of a sharper economic slowdown, including job losses and business failures, later this year. Already higher interest rates played a role in the collapse of Silicon Valley Bank.

Wall Street was on edge after Friday’s jobs release. The stronger-than-expected jobs report and the Silicon Valley Bank collapse sent all three major indexes down at least 1 percent at the close on Friday.

Silicon Valley Bank closed in the second largest bank failure in US history

“It’s been an incredible roller coaster ride,” said Liz Ann Sonders, managing director at Charles Schwab. “It’s hard to separate how much of the change in perception is based on different components of the jobs report or (Silicon Valley Bank), or a combination of the two.”

The Federal Reserve has raised interest rates rapidly over the past year in hopes of cooling the economy enough to bring down inflation. For a while, it seemed to work: Inflation fell, job growth slowed, and households and businesses seemed to be pulling back.

Economy adds 311,000 jobs in February, reflecting continued strength in labor market

But since January, a flurry of strong economic data has raised concerns that the central bank’s efforts have not gone far enough. In testimony to Congress this week, Fed Chairman Jerome H. Powell cited a hot streak of data since the start of the year from big job gains, robust consumer spending and stubborn inflationary pressures as reasons why rates might have to go higher — and potentially faster.

“Recent economic data has come in stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than previously expected,” Powell told the Senate Banking Committee on Tuesday. “Should all the data indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Fed may need more aggressive rate hikes, Powell says

Some economists now expect that when the Fed meets later this month, it may raise interest rates by half a percentage point – double what was previously predicted. Since it can take months for higher borrowing costs to work their way through the economy, there are concerns that the end result could be a deeper-than-expected slowdown.

“Two or three months ago, there was a sense that we could achieve a ‘Goldilocks scenario’ — that job growth could slow down without sharp declines,” said Matt Colyar, an economist at Moody’s Analytics. “But the last few months really complicate that narrative. It’s becoming more clear that the Fed is going to have to step things up.”

New inflation data due Tuesday will provide another snapshot of the Fed’s progress and inform its next move. Inflation, which peaked last summer at 9.1 percent, has fallen for seven straight months, although there are fears momentum may have stalled. Overall, prices have increased by 6.4 percent compared to a year ago.

Inflation is easing again, but it will take work to bring prices down further

The latest jobs report released on Friday contained some signs of weaker momentum. Unemployment rose from 3.4 percent to 3.6 percent as more people entered the labor market. Wage growth also slowed, although it was unclear how much the average hourly wage numbers were skewed by the composition of jobs in the economy. Employers added jobs in lower-paid sectors such as retail and leisure and hospitality last month while shedding higher-paid office workers.

Yet the economy continues to generate hundreds of thousands more jobs per month than are needed to keep up with population growth.

“The resilience of the labor market is a blessing and a curse,” said Diane Swonk, chief economist for KPMG. “When you generate 815,000 new payrolls in the first two months of the year, that’s astounding, and it means the Fed needs to keep hammering to curb underlying inflation.”

Silicon Valley Bank closed in the second largest bank failure in US history

For now, the Fed is still caught between its two main goals: keeping inflation low and employment high. Achieving both in the long term without significant fallout becomes more of a challenge.

Lawmakers from both sides of the aisle grilled the Fed chair this week over the possibility that higher interest rates could result in millions of job losses. Late. Elizabeth Warren (D-Mass.) asked Powell what he would say to people who could be out of work if the Fed keeps raising interest rates and causes a downturn.

“I want to explain to people … that inflation is extremely high and it’s hurting the working people of this country badly,” Powell said. “We are taking the only measures we have to bring inflation down.”

Rachel Siegel contributed to this report.

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