January Was Scorching Hot For Hiring And Raises—Maybe Too Hot For The Fed

The job market got off to a roaring start in January, as employers added nearly double the amount of jobs forecasters had expected.

U.S. employers added 353,000 jobs in January, the highest in a year, the Bureau of Labor Statistics said Friday. That was well over the 185,000 consensus forecast according to a survey of economists by Dow Jones Newswires and the Wall Street Journal. The unemployment rate stayed at 3.7%, close to historic lows, and average hourly wages grew 0.6% from December, double the forecast for 0.3% growth.

Not only that, but the bureau upwardly revised previous months’ reports, bringing the total jobs added in December to 333,000 from 216,000, and tacked on another 9,000 jobs to November’s previously reported gain of 173,000.

Overall, the jobs report showed an economy running hot—a bonanza for workers, but perhaps worrisome for officials at the Federal Reserve, who have feared that rapid wage growth could fuel inflation. The Fed has been holding its benchmark interest rate at a 22-year high since July, raising borrowing costs on all kinds of loans to slow the economy down and contain inflation, at the cost of a potential recession if it hits the brakes too hard.

With wages surging in a hot labor market, and no mass layoffs in sight, the report may spur the Fed to keep the rate high for longer than investors anticipated a few days ago. The chances for a March rate cut tumbled in the wake of the jobs report, going down to around 20% from almost 40% the day before, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

“This is an unambiguously a hotter labor market than Fed thought it had on its hands,” Ali Jaffery an economist at CIBC, wrote in a commentary.

However, minimum wages rose in January in almost half of the country, and that may have contributed to a jump in average earnings, economists at Oxford Economics wrote in a commentary ahead of the report. That could encourage officials at the Fed to overlook the monthly wage jump as a one-time event rather than a trend, Nancy Vanden Houten, lead U.S. economist at Oxford, wrote. 

While perhaps troubling for the Fed, there was much to celebrate from the perspective of typical household budgets, especially when combined with recent data showing inflation having slowed dramatically over the past year—gains that the Administration of President Joe Biden was eager to highlight. 

“Jobs, wages, lower inflation, all of these are combining to help increase the buying power of families,” said Jared Bernstein, chair of the White House Council of Economic Advisers, in an interview with Investopedia.