US hiring is solid while wages are cool, giving the Fed scope for slow rate hikes

The Federal Reserve Building in Washington, DC. The Fed left interest rates unchanged after raising them in March. (File image: Karen Bleier, AFP)

US job growth remained solid last month and the unemployment rate fell as wage growth slowed, suggesting a resilient labor market that could still give the Federal Reserve room for more slow rate hikes.

Nonfarm payrolls rose by 223,000 in December, capping a near-record year for job growth, a Labor Department report on Friday showed. The rise followed a revised 256k gain in November.

Average hourly wages increased 0.3% mom and 4.6% vs December 2021 after a downward revision through November. The slowdown is likely welcome news for Fed officials, who view wage pressures, particularly in the services sector, as the main obstacle to reaching their 2% inflation target.

The unemployment rate fell 0.1 percentage point to 3.5%, hitting a five-decade low as labor force participation slowly increased. Median estimates from a Bloomberg poll of economists had called for a 203k rise in payrolls and a 0.4% month-on-month rise in wages.

Job gains were led by healthcare and social assistance, leisure and hospitality, and construction.

US stock futures rose and Treasuries rallied as investors speculated that easing wage pressures would prompt the Fed to adopt less hawkish policy in the coming months.

The numbers underscore both continued strength in the labor market and how an ongoing mismatch between labor supply and demand is keeping upward pressure on earnings. However, the welcome increase in labor force participation coupled with slower wage growth suggests that some of the tightness in the labor market is beginning to ease.

A sustained slowdown in wage growth could offer some consolation to central bank officials that an important piece of the inflation puzzle is weakening.

Looking ahead, central bank officials expect the unemployment rate to rise about a full percentage point this year, while many other economists are predicting the US will slide into recession.

–Assisted by Chris Middleton.

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