US economy

Fed official says hot US labour market will not derail rate-cutting plans

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A top Federal Reserve official has insisted that the US’s hot labour market is continuing to cool, in a sign that last month’s unexpectedly strong employment numbers will not derail plans by rate setters to cut borrowing costs this year.

Loretta Mester, president of the Cleveland Federal Reserve and one of the officials who votes on interest rates, said last week’s jobs report for January showed the labour market was “remarkably resilient” — but said other indicators pointed “to some moderation”.

“At this point, I suspect we will see further moderation of wage growth, with a gradual slowing in job growth and an uptick in the unemployment rate over the year from its very low level,” she said.

Mester added that her “base case” was for the Fed to cut the federal funds target from a 23-year high of 5.25 per cent to 5.5 per cent “at a gradual pace” in 2024.

“If the economy evolves as expected, I think we will gain [the confidence to cut] later this year, and then we can begin moving rates down.”

Mester said at a press briefing later on Tuesday that she supported cutting rates three times this year — in line with the median forecast on the Fed’s December projections.  

“I’m still there at this point. But, of course, we’ll have to see how the economy evolves,” Mester said.

She added there was “no feeling now that we have to rush”.

“Policy’s in a good place now,” Mester said.

Fed governor Michelle Bowman, who is viewed as more hawkish, on Friday voiced concerns that the January data provided evidence that the labour market’s health could lead to services inflation remaining above the central bank’s 2 per cent goal. 

Data for January’s non-farm payrolls, a crucial measure of the US economy’s labour market, showed 353,000 jobs were created last month — almost double forecasts. 

The report also showed that the average US worker received an hourly wage of $34.55 — 4.5 per cent higher than a year ago.

While Mester acknowledged wage growth remained “a bit above the level consistent with 2 per cent inflation”, which is the Fed’s target, improvements in productivity meant those better pay deals could be justified by economic fundamentals.

“Our contacts tell us that, except for the healthcare sector, it is easier to hire than it was a year ago and that they are getting more applicants per job opening,” she said. Workers were also proving more reluctant to quit positions, she added. 

Mester cited the Employment Cost index — considered by many Fed officials as a better indicator of wage deals — which showed annual wage growth fell from 4.75 per cent in the first quarter of 2023 to 3.5 per cent in the final quarter.