Jobless rate falls fast, adds pressure for interest rate rise

Economists expect new data showing that the unemployment rate is falling and wages are rising to cement the Federal Reserve’s plan to begin raising interest rates this year as it tries to put a lid on high inflation.

The jobless rate fell to 3.9% in December, based on data collected during a period that largely predated the worst of the omicron-driven virus surge.

Unemployment peaked at 14.8% in April 2020 and had hovered around 3.5% for months before the onset of the pandemic. The fact that it is returning so rapidly to nearnormal levels has caused many central bankers to determine that the United States is nearing what they estimate to be “full employment,” even though millions of former employees have yet to return to the job market.

“This affirms the Fed’s conclusion,” Diane Swonk, chief economist at Grant Thornton, said following the report. “This is a hot labor market.”

Signs abound that jobs are plentiful but workers are hard to find: Job openings are at elevated levels and the share of people quitting their jobs just touched a record.

Employers complain they are struggling to hire and a shortfall of workers has caused many businesses to curtail hours or services. As a result, employers have begun to pay more to retain their employees and lure in new applicants.

Average hourly earnings climbed 4.7% in the year through December, faster than economists in a Bloomberg survey had expected and much more quickly that the typical pace of progress before the pandemic.

Those quick pay gains are seen as a signal to Fed officials that people who want jobs and are available to work are generally able to find it; the job market is what economists call “tight” and would-be workers are relatively scarce; and wages might begin to feed into prices. When companies pay more, they may also charge their customers more to cover their costs.

Some Fed officials are worried that rising wages and limited production could help sustain elevated inflation — now near a 40-year high. The combination of a healing job market and the threat of out-of-control inflation has prompted central bankers to speed up their plans to withdraw policy help from the economy.

Fed officials are already slowing the big bond purchases they had been using to support the economy. In addition to that, they could raise rates three times in 2022, based on their estimates.

Economists think those increases could begin as soon as March. That would make borrowing for cars, houses and business expansions more expensive, slowing spending, hiring and growth.

“It makes sense to get going sooner rather than later,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a call with reporters Thursday, suggesting that the moves could come very soon. “I think March would be a definite possibility.”

Officials have signaled that once rate increases start, they could promptly begin to shrink their balance sheet — where they hold the bonds they have purchased to stoke growth throughout the pandemic downturn. Doing that would help to lift longer-term interest rates, reinforcing rate increases and helping to further slow lending and spending.

Economists speculated following the jobs report that the new figures made an imminent rate increase even more likely, and that the central bank might even be prodded to remove its economic support more quickly as wages take off.

“We think that today’s report adds to the case for the Fed to kick off its hiking cycle in March,” researchers at Bank of America wrote following the release of the data. “The economy appears to be operating below maximum employment and inflation remains sticky-high.”