OPINION: More jobs are a good thing, but too much of a good thing can cause problems. Problems such as higher inflation rates. Boo!!
The Federal Reserve doesn’t love the employment report released Friday, which showed that 528,000 more jobs were created in July while the unemployment rate fell to 3.5%, matching the lowest rate in more than 50 years.
Too much of a good thing Here’s the catch: More jobs are a good thing, but too much of a good thing can cause problems. Problems such as higher inflation rates. Boo!! That’s why the Fed didn’t love this strong jobs report and that’s why financial markets expect that the Fed will have to get more aggressive about raising its benchmark interest rate FF00, +0.00% to bring down inflation. The stronger the jobs market is, the tougher the Fed has to fight.
If it did happen at a lot of companies, a dreaded inflationary wage-price spiral would ensue, with higher wages leading to higher prices all across the economy, which would in turn lead workers to demand even higher wages to keep up with inflation, which would force companies to raise prices again. And so on, in a vicious spiral of never-ending inflation.
The Fed is ultracautious right now. It got burned in 2021 when it ignored accelerating inflation by thinking it was temporary. So now the Fed is taking no chances with a wage-price spiral developing. It’s going to break the cycle by making sure wages don’t get too high. And if that means slowing the economy so much that companies will be laying off workers instead of throwing money at them to stay, so be it.
Considering the evidence that wages are rising at a 5% to 6% pace, there’s no reason for Fed policy makers to believe that they’ve done enough to bring the growth rate in wages down.
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