The latest jobs report released Friday showed the unemployment rate rose slightly in June as wage growth slowed, suggesting the labor market continues to slow after several years of remarkable strength. Federal Reserve officials are on the alert for signs the job market is on the brink of collapse and may remain vigilant.
Federal Reserve policymakers have two main goals: low and stable inflation and a strong labor market. They try to achieve these by either keeping interest rates low to stimulate the economy, or keeping them high, stifling growth.
Since the start of 2022, Fed officials have been raising interest rates to combat rapid inflation, focusing on curbing price growth rather than the employment side of their mandate. But inflation has now slowed significantly, and keeping the job market strong is once again a big priority for the central bank.
That's why Friday's jobs report could serve as a warning.
The unemployment rate has risen steadily over the past year, to 4.1% in June, up from 3.6% a year ago. The unemployment rate measures people who are actively looking for work but having trouble finding it, and the trend suggests jobs aren't as easy to come by as they were a year ago.
That's not all that surprising given other data. Job openings have fallen sharply after surging following the coronavirus lockdowns. Wage growth has slowed, a sign that employers are no longer paying as much to attract new workers. June data showed average hourly wages rose 3.9% year over year, still strong by historical standards but the lowest in years.
All of this combined could put the job market on the brink of another sharp downturn.
Fed officials have made clear that a sudden and significant weakening in the labor market could prompt a rate cut. The ongoing slowdown probably doesn't meet that threshold, but economists and investors increasingly believe that a labor market easing, coupled with subdued inflation, could lead to a rate cut as soon as September.
Investors, who tend to favor lower interest rates, gave stocks a slight boost at the open on Friday.
Wall Street had already been betting the Fed would start cutting rates in September, and Friday's numbers confirmed that expectation, making two quarter-point cuts this year fully priced in.