Stronger-than-Expected US Labor Market... Fed Faces Increasing Dilemmas

[Asia Economy New York=Special Correspondent Joselgina] Despite high-intensity tightening measures to reduce inflation, the U.S. labor market remains strong. This is expected to deepen the Federal Reserve's (Fed) dilemma, which has hinted at slowing the pace of interest rate hikes as early as this month.

The U.S. Department of Labor announced on the 2nd (local time) in its November employment report that nonfarm payrolls increased by 263,000 last month. This far exceeded the expert forecast of 200,000. By sector, increases were confirmed mainly in leisure and hospitality (88,000), healthcare (45,000), and government public jobs (42,000).

The unemployment rate remained steady at 3.7%, the same as the previous month. This is close to the lowest level in over 50 years. The labor force participation rate fell by only 0.1 percentage points to 62.1% compared to the previous month.

Notably, average hourly earnings surged 0.6% from the previous month, marking the largest increase since January. This is double the market expectation. Compared to the same month last year, wages rose 5.1%, surpassing the 4.9% increase in October.

These indicators are expected to pose a burden on the Fed, which has taken a tough stance on curbing inflation. Bank of America (BoA) economists stated, "This indicates that the Fed has more work to do and that labor market mismatches may worsen," forecasting the terminal rate to rise to 5-5.25%.

If the mismatch where labor demand far exceeds supply continues, companies facing labor shortages will have no choice but to raise wages to secure workers. This, in turn, acts as a factor that fuels inflation again. This is why Fed Chair Jerome Powell pointed out in his Brookings Institution speech that "the labor market must calm down first," even while suggesting a slowdown in the pace of hikes. At that event, Powell also lamented that controlling inflation is difficult due to recent high wage growth.

Accordingly, there are growing voices that the Fed's terminal rate will rise further and that the Fed's hawkish (preference for monetary tightening) stance may strengthen more than the market expects. After the employment report was released, investors in the federal funds futures market priced in over a 36% chance of a 5-5.25% rate by March next year. The probability of 5.25-5.50% stood at 7.5%.