The latest jobs report, released on Friday, showed the unemployment rate rose in June as wage growth slowed. This is a sign that the labor market is slowing down after years of remarkable strength. This may make Federal Reserve officials cautious, as they look for signs that the job market is about to slow.
Fed policymakers have two main goals: achieving low, stable inflation and a strong labor market. They try to accomplish this by setting interest rates, either keeping them low to strengthen the economy or raising them to a higher level to spur growth.
Since the start of 2022, Fed officials have been using higher rates to fight accelerating inflation, focusing more on keeping price increases in check than on the employment side of their mandate. But now inflation is easing noticeably, and keeping the job market strong has once again become a big priority for central bankers.
That's why the jobs report released on Friday could be a warning moment.
Unemployment is increasing continuously compared to last year: June data 4.1 percent reading That's up 3.6 percentage points from a year ago. The rate measures people who are actively looking for work but struggling to find it, so the trends suggest that finding a job isn't as easy as it was a year ago.
That's not a huge surprise based on other data. Job losses have fallen sharply since the coronavirus lockdowns. Wage growth is slowing, a sign that employers are no longer paying well enough to attract new workers — June data showed average hourly earnings rose 3.9 percent from a year earlier, still solid by historical standards but the lowest in several years.
All of this could lead to a sharp decline in the job market.
Fed officials have made clear that sudden and notable weakness in the labor market could prompt them to cut rates. The ongoing recession probably falls short of that standard, but with inflation on the decline, economists and investors think the softening labor market will pave the way for a rate cut by September.
Investors who prefer lower interest rates pushed stocks slightly higher in early trading on Friday.
Wall Street was already leaning toward expectations that the Fed would start cutting interest rates in September. Data released on Friday solidified those expectations, setting up two quarters of rate cuts this year.