Fed turns focus to inflation as job market stabilizes
A stable labor market has given the Federal Reserve more flexibility to focus on mounting inflation risks stemming from the war in Iran, which have weakened the case among officials for interest rate cuts.
April’s jobs report, released by the Bureau of Labor Statistics on Friday, ratified the central bank’s view that it can afford to hold the federal funds rate steady at a range of 3.5% to 3.75% as it contends with an uncertain economic backdrop.
Employers hired significantly more people last month than expected, adding 115,000 positions. The unemployment rate held steady at 4.3%.
Inflation has shot higher in the roughly two months since the Middle East conflict began, reflecting the run-up in oil prices, airfares and other travel costs, and shipping-related expenses caused by the shuttered Strait of Hormuz, a crucial oil and natural gas shipping path. Gasoline prices have risen to $4.55 per gallon on average, according to the AAA motor club, up from around $3 before the war.
As of April, data from the Federal Reserve Bank of New York showed that supply chain pressures are at the highest level since July 2022, when the economy was reeling from the aftershocks of the pandemic.
The worry for Fed officials is that intensifying price pressures will broaden to other parts of the economy, including the services sector. That would produce a much more persistent inflation problem, one that would probably require higher rates to root out. The Fed has missed its 2% inflation target for roughly five years.
No Fed official has backed rate increases, however, reflecting a concern that officials also harbor about the trajectory for economic growth amid the energy shock. Higher prices could eventually temper consumer spending, causing a slowdown that could result in job losses.
So far that has not happened, as April’s data Friday confirmed. A shift to a higher unemployment rate would revive the debate about resuming interest rate cuts, which have been on hold since January.