The Fed is winning its war on the labor market. What does that mean for interest rates?

Out of BLS: The number of people employed outside of agriculture rose by 206,000 in June, and the unemployment rate remained almost unchanged at 4.1 percent, the US Bureau of Labor Statistics reported today. New jobs were created in the public sector, health care, social assistance and construction.

Bond yields fell after the report was released, meaning the market interpreted it negatively. But why is that when a whopping 206,000 jobs were created? First, there were negative revisions to the previous two reports. That said, we’re still above my target of 140,000-165,000 as we approach the 159 million jobs figure in the Nonfarm Payroll data – where we should be after we regain all the jobs we lost to COVID. But the unemployment rate has risen and is now above 4% for the first time in a long time.

The negative revisions of the previous reports leave the 3-month average at about 177,000If you take government jobs out of the equation, we arrive at 146,000 jobs per month on a 3-month average, so we are getting closer and closer to my goal.

What’s unique about my target is that the employment rate is higher now. This means that if we don’t release a major jobs report, the unemployment rate will rise even if there are no job losses. I touched on this in last month’s jobs report article and have talked many times about how we should expect higher unemployment rates in the future.

Below you will find the data on job creation in the last 12 months

The Fed is concerned that too many Americans are making too much when wage growth is high. To keep it as simple as possible, the Fed would like to see wage growth at 3% because it doesn’t think productivity data is as strong as it’s being reported. Wage growth is cooling, but it wants to see more damage done here.

Below you will find data on wage growth over the last 12 months, which peaked at almost 6% in 2022 and currently stands at 3.9%.

The other labor market data we had this week (job openings) shows the Fed is having some success in the labor market. The job openings data is what the Fed relies on and it is falling noticeably. As we can see in the chart below, we have a historic decline in that data line from 12 million to 8 million. The Fed has been open about saying that the job openings data shows that the labor market is no longer tight. The black line below shows that the uptrend in that data line has broken.

The unemployment data is the most important labor market data we have right now, and it’s the most important of all. The Fed even commented on this data in a recent meeting when they publicly stated that they were following the unemployment data, which was trending downward. Well, they can’t say that anymore, since unemployment has been rising for several months.

The 4-week average of unemployment figures is 238,500. My line in the sand for a recession with job losses if this number exceeds 323,000 at the 4-week average. I hope the Fed doesn’t wait until we get above that level to reverse course.

Is the Fed winning the war on the jobs market? Yes, it has been for many months! So what is their next move? Do they wait until jobless claims top 323,000 before adopting a more dovish tone, or do they simply bury their heads in the sand, let the recession and job losses happen, and chalk it up to the need to beat inflation?

One thing I’ve been stressing since 2022 is that the Fed is operating under an old Fed model of fighting inflation by attacking labor supply and cooling wage growth. So far, they’ve had a lot of success in the American labor market. So the question for the second half of 2024 is whether they’ll be more aggressive in promoting dovish monetary policy or continue to use the symbolic “we need more confidence” statement before they act. I believe they want to see further deterioration in the labor market before they pivot. I hope I’m wrong about that premise – time will tell.