A sharp fall in the US unemployment rate has set the stage for the Federal Reserve to accelerate the slowdown of its stimulus package this month, economists said, giving it more flexibility to hike rates earlier next year if needed.
The world’s largest economy created 210,000 jobs in November, about half as fast as economists expected and well below the previous month.
But a sharp improvement in the unemployment rate, which fell 0.4 percentage points to 4.2 percent, as well as the number of Americans returning to work, confirmed expectations that the Fed would be in less than two weeks with a more aggressive deadline for that Withdrawal of support.
“This employment report gives them an opportunity to announce a faster cut,” said Margaret Kerins, global head of fixed income strategy at BMO Capital Markets. “They have to taper faster so that they are ready to take off sooner in order to maintain price stability and prevent inflation from stabilizing.”
“It’s a risk management approach and the upside risk of inflation now outweighs employment risk,” she added.
Jay Powell, the newly appointed Fed chairman, said in a testimony to Congress this week that he would support the central bank as its asset purchase program ends earlier than the pace announced last month.
At the last monetary policy meeting in November, the Federal Open Market Committee announced a $ 15 billion reduction in its $ 120 billion bond purchase program.
Powell expressed support for a possible end to this process “maybe a few months early” – a fundamental change that is clearly supported by other Fed officials.
In an interview with the Financial Times on Thursday, Loretta Mester, president of the Cleveland Fed and voting member of the FOMC for next year, said she supported a faster throttling so that the central bank had the “optionality” to raise interest rates faster than tame inflation.
The Fed has announced that it will not hike rates until it has hit an average of 2 percent inflation and maximum employment.
November’s job report shows progress toward the latter goal, said Sarah House, chief economist at Wells Fargo.
“The job market continues to pick up rapidly,” she said. “Yes, we have seen a disappointing increase in the number of employees. . . But the fact that the unemployment rate continues to fall and labor force participation is rising shows that we are moving towards maximum employment. “
According to economists at Morgan Stanley, the so-called participation rate “jumped” “noticeably” and rose to 61.8 percent from 61.6 percent in the previous month. While it’s still 1.5 percentage points lower than pre-pandemic levels, it has been a welcome development after many months of stagnation as workers have been held back by Covid-related concerns and other issues.
The employment-to-population ratio for prime-age workers, which measures the proportion of Americans in the 24 to 54 age group with a job, also made significant strides, rising to 78.8 percent. This is the highest value since the beginning of 2020 and a jump from 78.3 percent in October.
Economists also pointed to the portion of the November Household Survey of the Employment Report that suggests the number of employees rose by 1.1 million as 594,000 more people entered the workforce. The household survey is often seen as more volatile than the “establishment” survey, which, however, recorded significantly more subdued gains.
Coupled with moderate wage increases and the narrowing gap in the unemployment rate between white and black workers, Kristina Hooper, Invesco’s chief global market strategist, said the “fairly positive” job report is keeping the Fed on track to move forward with its plans.
“We’re going to get an accelerated reduction in December, especially since the very preliminary anecdotal evidence we’re getting on Omicron is that it’s mild,” she said.
“The big part of the Powell Pivot isn’t so much that we have an accelerated taper, but that it [may mean] Interest rate hikes earlier than expected, especially in view of the Omicron variant. “
Market measurements of interest rate expectations, as estimated by Fed Funds futures, suggest that the central bank will hike rates roughly three times over the next year. Barclays made an adjustment back in May, while Evercore ISI and Goldman Sachs are expecting them in June.