Tomorrow morning, economists and investors everywhere will be focused on one document, the US August jobs report, for a read on how the world's biggest economy is faring.
Fed officials, in particular, will be watching closely, as it is one of the last major economic data releases they'll have before their mid-September policy meeting.
Here's what you need to know:
- Even as consumer sentiment and economic growth has slowed this year, the labor market has been on fire, my colleague Alicia Wallace reports.
- Or rather: "The labor market isn't just running hot, it's like a burning inferno," said Megan Greene, global chief economist for the Kroll Institute.
- Forecast: Economists estimate that about 300,000 jobs were added in August. That's a big slowdown from July, when 528,000 were added, but not the kind of slowdown the Federal Reserve is looking for.
Hold up — the Fed wants less job growth? Seems counterintuitive, but, yeah. The Fed has a dual mandate to ensure maximum employment (which we have) and price stability (which we definitely don't have). And as Chairman Jay Powell reminded the world so bluntly in Jackson Hole last week, the Fed is going to keep raising interest rates (which makes borrowing more expensive, slowing business activity) until inflation relents.
It's a long road ahead: Price surges are hovering around a 40-year high of 8.5%. The Fed wants to get that down to 2%.
In effect, the Fed is wagering that the resulting pain of unemployment is less broadly harmful than the pain of inflation.
Key quote: "Without price stability, the economy does not work for anyone."
Of course, not everyone agrees with the Fed's strategy. Much of the root cause of inflation — supply chain disruptions, the pandemic, geopolitical tensions — are well out of the central bank's jurisdiction. Raising interest rates tackles the demand side (consumers will buy less) rather than addressing the supply side.
"What [Powell] calls 'some pain,' means putting people out of work, shutting down small businesses because the cost of money goes up," Senator Elizabeth Warren told CNN's Dana Bash last weekend.
She's not wrong. Powell often euphemistically calls it "softening of labor market conditions." What he means is higher unemployment, which means less consumer spending, which brings prices down.
BOTTOM LINE
The Fed's trying to trade one kind of pain (inflation) for another kind of pain (unemployment).
But Powell has repeatedly said that the labor market's strength is evidence the economy can handle higher rates. Of course, that's little consolation to the people whose jobs end up on the chopping block.
A third three-quarter-point hike isn't a foregone conclusion. The Fed will have to weigh tomorrow's jobs numbers along with the results of the consumer price index, due out a week before the central bank's Sept. 21 meeting, to get a clearer view of the inflation puzzle.
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