Why Labor Market Data Has Become The Focus For Investors And The Fed

After nearly three years of inflation reports grabbing all the headlines, data on the labor market is taking center stage in the eyes of financial markets and the officials who make decisions on interest rates.

In a blog post on Wednesday, Federal Reserve Bank of Atlanta President Raphael Bostic joined the list of Federal Reserve policymakers who have said they’re turning their attention as they decide when and how to cut interest rates. The Fed has a “dual mandate” for how it manages the U.S. economy—keep inflation under control and make sure as many people as possible have jobs.

Inflation has fallen in recent months, simmering not far from the Fed’s goal of a 2% annual rate. At the same time, cracks have started appearing in the formerly roaring labor market. 

“I have focused mainly on the price stability side of the mandate since inflation spiked in 2021, as we were clearly further from that goal than from the goal for maximum employment,” Bostic wrote. “But as the labor market has cooled in recent months, the balance of risks has shifted, and I am today giving basically equal attention to the maximum employment objective.” 

Fed Chair Jerome Powell said much the same last month in a major policy speech.

A Big Pivot for Policymakers and Investors

The shift is a notable one. For the last three years, Fed officials have focused on inflation when making decisions about interest rates. Stocks often fluctuated with inflation news, at times rising when it looked like falling inflation would allow the Fed to cut interest rates, and falling when inflation flare-ups pushed the expected date for rate cuts farther away. 

As inflation reports have gotten more routine, the labor market has gotten more attention. That’s especially been the case since the July jobs report showed a surprising increase in the unemployment rate and sent financial markets reeling amid concerns that the economy could be headed toward recession.

Friday’s Jobs Report in Focus

Investors will be closely reviewing the August jobs report, slated for release Friday morning, for fresh insights on the health of the economy as well as clues about how fast, and far the Fed might cuts its key fed funds rate in the months ahead.

Fed officials and economists are also monitoring the labor market for any sign of mass layoffs and recession as the economy grinds under the weight of high borrowing costs—the fed funds rate currently sits at its highest since 2001, the result of the Fed’s campaign of rate hikes intended to combat the post-pandemic surge of inflation. 

“Both investors and policymakers tend to be preoccupied and fixate on something, and at this point, the fixation is indeed on the labor market,” said Jeffrey Roach, chief economist at LPL Financial.