Miscellaneous Information September 8, 2023

The Unflappable Labor Market

The Unflappable Labor Market

September 8, 2023

  • Unemployment remains stubbornly low throughout Fed’s hiking cycle
  • Demand for workers remains high

The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The Fed’s dual mandate guides monetary policy decisions to target two percent year-over-year inflation with a four percent unemployment rate. Inflation has occupied the macroeconomic spotlight over the past 18 months, reaching record highs in June of 2022 and causing the Fed to hike interest rates at a record pace. Despite the unprecedented hiking campaign, the U.S. unemployment rate remains at a low 3.8 percent.

Labor Market 1













The Phillips Curve, a frequently cited economic concept, states that inflation and unemployment have a stable and inverse relationship. This concept has not been proven in the short term; over the past year, the year-over-year Headline Consumer Price Index (CPI) figure has fallen from a 9.1 percent peak to the current level of 3.2 percent, while over that same period, the unemployment rate has risen slightly from 3.6 percent to 3.8 percent but remained relatively steady. One might have expected that a consequence of the Fed’s hiking campaign would be a more substantial uptick in unemployment, but despite notable layoffs in the tech sector, this has not been the case. A more meaningful increase in unemployment—one where the increase is coming about from fewer positions rather than an increased labor force participation rate—would be seen as a positive sign for the Fed because it would help curb consumer demand and stabilize prices. Unemployment has remained low, even while inflation has declined, due to the demand for workers. Recent Job Openings and Labor Turnover Survey (JOLTS) data shows that there are 1.57 job openings per unemployed persons in the United States. The July JOLTS data reported that job openings declined by 338,000 to a seasonally adjusted 8.8 million in July from the prior month. That was the lowest level since March 2021, but it was still well above pre-pandemic levels.

Labor Market 2


















Despite the high demand for workers, the labor market is beginning to show slight signs of cooling. Wage growth is beginning to slow: Nonfarm Payrolls in June and July were revised down a combined 110,000. Recent economic prints have been relatively in line with market expectations; Bloomberg’s World Interest Rate Probability (WIRP) function shows a 96 percent chance of a pause in rate hikes at the Fed’s September meeting, as committee members continue to observe the lagging effects of their rate hike cycle.

The September meeting for the Fed also brings a refresh of their Summary of Economic Projections. In this data release, we get updates of the dot plot, where members of the Federal Open Market Committee (FOMC) provide their projections for the year-end Federal Funds rate for the next several years in addition to gross domestic product (GDP) growth, inflation expectations, and unemployment projections. This data set will likely be the most anticipated part of the meeting, as determinations around potential recession and rate cuts will show. Economic releases have been largely meeting expectations, so this treasure trove of data will be the real star of the show for the September meeting.


Source Beyond Insights | BERKADIA