- The
Fed is set to start raising interest rates this month. That could slow the hiring recovery. - Higher rates cool inflation, but they raise borrowing costs and lead firms to grow less quickly.
The labor market's recovery is moving at a historically fast pace. The
COVID-19 cases are down, the country is reopening, and job creation is running strong. The US added 678,000 nonfarm payrolls through February, according to government data out Friday, marking the largest one-month gain since July. While the country is still down 2.1 million jobs from pre-crisis levels, it's on track to fill that deficit in a matter of months.
Yet the recovery is likely to face a new headwind in just a few weeks. The Federal Open Market Committee is scheduled to meet on March 15 and 16 to adjust the Fed's policy stance, and it's all but certain policymakers will vote to raise the central bank's benchmark interest rate for the first time since before the pandemic.
The move is all in the name of easing inflation, which has become the biggest headwind in the pandemic
Fed Chair
"I am inclined to propose and support a 25-basis-point rate hike," Powell said. "To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal-funds rate by more than 25 basis points at a meeting or meetings."
The move will kick off a years-long process of policy normalization for the Fed. With prices soaring at the fastest pace in four decades, the central bank hopes to remove its pandemic-era aid and cool inflation. Lifting interest rates is the Fed's best tool for doing so. Higher rates make it more expensive for people and businesses to borrow, and that tends to ease demand. That helps close the supply-demand gap, which has fueled the rapid jump in prices since early last year.
Yet
In many cases, that translates to slower hiring. While we're likely to still see healthy job growth through the rest of the year, the eye-popping payroll figures of the past few months might be behind us.
The effects of a March rate hike wouldn't be immediate. There were roughly 10.9 million job openings in December, signaling companies were still struggling to rehire. Labor-force participation is also far from fully recovered as millions of workers remain on the labor market's sidelines. Even as rates start to climb, labor demand will likely stay hot.
But how quickly that demand is met will likely slow. The Fed's focus has shifted to fighting inflation, and February will be the last month to enjoy near-zero rates and the rapid job creation that came with them.