Federal Reserve officials have been waiting for clear evidence that the demand for workers is falling back in line with America’s limited supply of available applicants. Friday’s job report offered a glimmer of that slowdown, but not yet enough of one to be decisive.
Employers hired 223,000 people in December, more than economists expected but fewer than the previous month. Importantly for the Fed, average hourly earnings picked up by 4.6 percent, less than forecast and a slowdown from a revised-down 4.8 percent in November.
Central bankers have two goals, maximum employment and stable prices, and they would typically be happy about a superstrong labor market like the one that exists today. But inflation touched a 40-year high last summer and remains elevated, and Fed policymakers think it would be tough to wrestle it back down to an acceptable pace with a job market that is so out of whack. As companies pay their workers more to retain them and attract new ones, they are likely to also charge more to protect their profits.
As a result, the Fed has increasingly focused on the job market as the part of the economy that needs to slow for it to successfully wrangle rapid price increases.
Services inflation outside of housing remains elevated, and “that’s really a function of the labor market, largely,” Jerome H. Powell, the Fed chair, said during his December news conference. “The biggest cost, by far, in that sector is labor. And we do see a very, very strong labor market, one where we haven’t seen much softening.”
That makes Friday’s moderate slowdown a step in the right direction — but likely not sufficient deceleration.
Mr. Powell has suggested that wage growth needs to cool notably for inflation to return to normal: He said in late November that measures including average hourly earnings were “about one and a half percent higher” than what would be consistent with stable inflation.
Fed officials have also suggested that job growth should be slowing down. By the estimates they look at, the nation only needs to add about 100,000 jobs per month to accommodate population growth over time, Mr. Powell said late last year.
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