Fed faces new labor market data

US job openings and a consumer confidence index exceeded all market expectations, indicating the strength of demand. The data may increase inflationary pressures. Thus, another 75 basis-point interest rate hike is expected.

This month, the Conference Board Sentiment Index hit a three-month high, signaling consumers' readiness to make big purchases. Job vacancies, in turn, have suddenly risen to 11.2 million, pointing to the tension in the labor market. 

The key indicator to curb inflation is labor market statistics. The Fed, in particular, pays attention to the number of jobs available per unemployed person in the U.S., which increased to 2 offerings.

Overall, the figures reflect a strong household demand, despite the monetary tightening by the Fed. To combat inflation in the U.S., an adequate reduction in consumer spending and an easing of wage pressure is necessary.

“The Fed has a long way to go. The ratio of job openings per unemployed person has reached 2.0, which is another sign of supply and demand imbalance in the labor market,” said Wells Fargo economists Sara House and Michael Pugliese. 

Fed Chairman Jerome Powell addressed the annual symposium participants in Jackson Hole, Wyoming. Reducing inflation to 2% remains "the key focus of the central bank," he noted. 

The last regulator’s meetings ended with a 75 basis point hike in interest rates. The next increase is likely to happen at the Fed session scheduled for September 20-21. A monthly job report, along with updates to US consumer price statistics, will play a critical role in the decision-making process. 

Tuesday's figures suggest that demand for labor is unlikely to ease anytime soon, despite rising interest rates. The consumer confidence index, in turn, gives more optimistic forecasts associated with falling gasoline prices. However, the cost of essentials, including food, continues to rise.

“If consumer confidence is strong, they’ll proceed spending. There is a high risk of inflationary pressures, leading the Fed to tightening,” said Derek Holt from Scotiabank. The economist expects another interest rate hike by 75 basis points in September.

Following the speech by Powell and other politicians at Jackson Hole, investors are also predicting a rate increase of 0.75 percentage points. This will also have a direct impact on the price of futures contracts that are pegged to the U.S. benchmark rate. 

Over the past 8 months, job openings have exceeded 11 million, while the unemployment rate hit a record low in 48 years. 

The largest rise was recorded in the areas of retail trade, transportation and utilities. The number of vacancies has also increased in arts, entertainment and recreation. Concurrently, there are more job offerings in government agencies, local administrations and educational institutions.

A slowdown in wage growth is likely to happen in the near future. The share of consumers leaving the private sector hit a record low for the first time since May 2021.

The Conference Board report also notes that the share of Americans who claimed vacancies to be “plentiful” dropped to 48%. Six months from now, most respondents expected a business environment to boost. In fact, consumers are better at assessing their short-term financial outlook.