The U.S. economy received a great jobs report today, at least by the sad standards of the past few years. The Wall Street Journal summarizes:
The U.S. added 162,000 jobs in August, the Labor Department reported Friday, a much-stronger-than-expected result that suggested the labor market shook off its early-summer doldrums.
The unemployment rate stayed steady at 4.1%. That leaves it at a historically low level that indicates the labor market remains generally healthy.
Economists polled by The Wall Street Journal had forecast the report would show the economy gained just 53,000 jobs. The unemployment rate was in line with their expectations.
It’s especially good news because it removes the last excuse the Federal Reserve had — a weak labor market — to not begin raising interest rates in September and finally bring inflation back under target.
(For those confused about the mechanism, the interest rates that the Fed sets determine the rate at which banks lend money to one another. By raising the cost of borrowing, higher baseline rates would reduce credit creation, thereby slowing the expansion of the money supply by way of fewer new deposits. A slower-growing money supply should produce lower monetary inflation. Thus, higher rates are the “predominant tool,” as Fed chair Kevin Warsh puts it, to tame persistent inflation of the kind we still have.)
Nick Timiraos, chief economics correspondent for the Journal, agrees with this assessment:
Federal Reserve officials had made clear in the run-up to their Sept. 15-16 meeting that inflation data, more than anything else, would help them decide whether or not to raise rates after having held them steady this year. Even if the strong August employment report does not change that calculus, it does remove an objection to raising rates.
Had August been weak on top of a negative July print, there might have been a better argument against tightening: Why raise rates into a labor market that’s not showing any strength? That argument isn’t available after Friday’s employment report flipped July’s negative reading to positive and pushed six-month average hiring growth to the highest level in more than two years.
Even before today’s sunny report, Kevin Warsh did not believe interest rates were too high. He said in Jackson Hole last week that he would be “hard pressed to describe broad financial conditions as restrictive.” Indeed, interest rates are below what economists consider a neutral rate, and inflation is still running hot across many categories of prices.
At some point, if Americans want inflation to return to normal levels, the Fed is going to have to do what it knows it has to do.