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WASHINGTON – Hiring and vigorous wage increases last month have left the Federal Reserve almost certain to raise interest rates in December and continue to increase them gradually next year.
Employers created 250,000 jobs in October, the Department of Labor said Friday. The average hourly earnings of workers increased by 3.1% over the previous year – the fastest growth since 2009 – while the unemployment rate remained at 3.7%, which corresponds to the lowest level recorded in 49 years.
The figures show that the labor market has continued to strengthen for a decade to become the second-longest expansion ever recorded. This has occurred despite the cautious efforts of the Fed in recent years to prevent the economy from overheating by raising interest rates in the near term.
While rising wages and low unemployment are good news for workers, Fed officials fear that labor shortages will lead to higher wages and prices that are enough to trigger an acceleration. inflation. This would force the central bank to raise interest rates more aggressively to keep inflation under control, which could tip the economy into recession.
For now, however, Fed officials are likely to keep pace with the pace. They said they would probably leave their benchmark interest rate unchanged at between 2% and 2.25% at their political meeting next week.
Policymakers said in September that they planned to raise the rate by 1 percentage point until 2019. Under this scenario, the unemployment rate is expected to fall to 3.5% by the end of next year and continue until 2020, with inflation exceeding only 2.1%. .
However, for this to happen, employment growth would have to slow down from its recent pace. Economists estimate that gains of about 145,000 jobs a month would stabilize the unemployment rate.
Central bank officials estimate that a long-term sustainable unemployment rate is 4.5%. Below that, in theory, inflationary pressures could accumulate. But they also noted that this so-called natural rate has changed over time and is hard to pin down in the short term.
In a speech in August, Fed Chairman Jerome Powell pointed to the vagueness of estimating such economic variables. As a result, the Fed should avoid overly influencing monetary policy, especially when inflation is performing well.
The bright side, from the Fed's point of view, is that inflation has remained under control this year, around its 2% target, even with the drop in the unemployment rate and companies protesting the shortages in the economy. workforce.
Although officials may have doubts about the low unemployment rate without causing sharp price increases, they are also afraid of being caught by surprise. History has shown that the process of reducing high inflation is costly.
Fed Vice President Richard Clarida said in a speech last month that inflation and public expectations of future inflation would play an increasingly important role in his political preferences.
"If strong growth and job gains persisted and were accompanied by stable inflation, inflation expectations and Fed policy expectations, this would argue against rising rates. short-term interest rate than I currently expect, "he said.
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