The Fed's Interest in the Labor Market

Jerome Powell, head of the Federal Reserve (Fed), signaled a modest increase in the US basic interest rate as a decision for the upcoming FOMC meeting on December 14 in his presentation last Wednesday (November 30) at the Brookings Institution in Washington-DC.

After four consecutive meetings with rises of 75 basis points, expectations have now converged on a raise of only 50 basis points this time. 

The basic rate would end the year in the range of 4.25% to 4.5% per annum, up from nearly zero in March of that year.

Powell, on the other hand, stated that inflation in the United States remains high. He stated that inflation in personal consumer spending was estimated to be 6% per year in the 12 months leading up to October. Interest rates will have to rise to restrictive levels in order to keep inflation at 2% per year. 

He stated that the Fed still has more ground to cover, implying that interest rates will be raised again in 2023.

Monetary tightening is intended to restrict demand growth relative to aggregate supply, which will necessitate a sustained period of below-trend US economic growth, he said. Despite monetary tightening and slower growth this year, he saw little significant progress in reducing inflation.

Powell's speech divided attention between inflation and the labor market. The motivation for this was clear when he addressed the three main components of the inflation rate: goods, housing, and non-housing services (Figure 1). 

While core inflation in goods fell from high levels during the year, housing services continued to climb at a 7.1% annual pace in the last year. Powell, on the other hand, reported a significant slowing in the rate of price increases in new leases since the middle of the year.