The Fed’s Focus on the Labor Market

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

After four meetings in a row with hikes of 75 basis points, expectations now focus on an increase of only 50 basis points this time. From almost zero in March of that year, the basic rate would end the year in the range between 4.25% and 4.5% per annum.

On the other hand, Powell observed that inflation in the US remains high. He highlighted an estimate that, in the 12 months up to October, inflation in personal consumer spending was at 6% per year. Interest rates will have to reach restrictive levels enough to drive inflation down to 2% a year. He added that there is still more territory to cover by the Fed, what means that there would be some additional hike of interest rates in 2023.

Monetary tightening is geared at lowering demand growth relative to aggregate supply, he said, which will need a sustained period of below-trend US economic growth. Despite the monetary tightening and slower pace of development this year, he was still not seeing clear headway in controlling inflation.

In Powell's presentation, the labor market and inflation were given different levels of attention. When he discussed the three main factors that make up the inflation rate—goods, housing, and services other than housing—the motivation was clear (Figure 1). While the core inflation of products fell from high levels throughout the year, housing services continued to climb at a rate of 7.1% in the last 12 months. Powell observed, however, the dramatic decline in the pace of price rise in new leases since the middle of the year.