Biden Loves the Jobs Report, but the Fed Likely Does Not

WASHINGTON — President Biden is overseeing the sort of labor market that, by most measures, any White House would celebrate. Unemployment remains near a half-century low, the Labor Department reported on Friday. As it recovers steep pandemic losses, the economy has already added more jobs through November than in any other year on record, except for 2021, Mr. Biden’s first in office.

The president cheered those numbers on Friday: “We continue to create jobs — lots of jobs,” he told reporters before signing a bill to avert a nationwide rail strike. “We’re in a situation where things are moving — moving in the right direction.”

But for the Federal Reserve, the report offered little to celebrate. Officials have been waiting for hiring and wage growth to slow, paving the way for a more balanced economy where inflation, which is running near a 40-year high, can return to normal. Instead, both have remained resiliently strong even as the early effects of the Fed’s rapid 2022 interest rate increases begin to play out.

“In the labor market, demand for workers far exceeds the supply of available workers,” Jerome H. Powell, the Fed chair, said during a speech this week. Officials are looking for “the restoration of balance between supply and demand in the labor market.”

That divide — between whether strong job gains should be seen as good news for workers or bad news for inflation — underscores the unique challenges that lie ahead for the economy and the White House next year.

The president has consistently preached cautious optimism about the economy, even as inflation has stubbornly defied his administration’s predictions that it would soon moderate. “We are seeing initial signs that we are making progress in tackling inflation, even as we make the transition to more steady, stable economic growth,” Mr. Biden said in a news release on Thursday, before the jobs numbers were released. “That’s good news for the American people, and further evidence that my economic plan is working.”

The jobs report in some ways supported his sunny take. Employers added 263,000 jobs in November, continuing to provide the backbone of administration claims that the recovery is on track. In a background call with reporters on Thursday, administration economic officials emphasized that recent data, including consumer spending figures and current measures of quarterly growth, continue to show the U.S. economy holding up far better than comparable wealthy nations around the world.

Administration aides have also expressed a rising confidence that still-high inflation could, finally, be trending toward historically normal levels.

Yet the same resilience that is giving the Biden administration positive talking points today could create trouble later on if it makes it harder for the Fed to stamp out rapid inflation.

Consumer Price Index data show that inflation has begun to moderate, but it remains far faster than the Fed’s goal: It was running at 7.7 percent in October compared with a year earlier, much more than the roughly 2 percent annual gains that used to be the norm.

Fed officials do see hopeful signs that inflation will cool next year. Supply chain problems are easing and market-based rent prices are no longer jumping, and both of those changes should provide some relief. But with the labor market so strong and wages climbing quickly, central bankers have also warned that it will be difficult for price increases to fall back to normal levels.

The labor market “shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time,” Mr. Powell said this week.

That is what makes Friday’s report an awkward one for the central bank. It provided welcome news that the labor market is resilient, on one hand, but it also showed that companies are hiring at more than 2.5 times the pace the Fed thinks is necessary to accommodate population growth. Wage growth re-accelerated on a monthly basis, climbing a hefty 5.1 percent compared with the prior year.

Investors read the report as a sign that the Fed will need to keep raising rates into 2023. That could make it harder to achieve a so-called “soft landing,” where inflation slows but the economy avoids recession — an outcome that both Mr. Biden and Mr. Powell say they would like to see.

“To the extent that Chair Powell put some air into the soft landing narrative this week, this report undoes that to some degree,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research.

Mr. Dutta said that if the economy remains strong, that could prod Fed policymakers to work harder to slow consumer and business demand. That would increase the chances that the economy gets painfully squeezed down the road, sending unemployment higher.

Mr. Biden seemed to brush off those fears on Friday, noting that in recent months, wage gains have outpaced inflation: “Wages for working families, in fact, over the last couple months have gone up. Up,” he said. “These wage increases are larger than the increase in inflation over the same period of time.”

But Fed officials have struck a firmer tone, making it clear that pay gains will need to come down in order for them to be confident that inflation is under control.

“Strong wage growth is a good thing,” Mr. Powell said this week. “But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation.”

The labor market could still slow next year, helping to weigh on inflation just as price increases on goods moderate and rent growth begins to cool — after all, the Fed has raised rates significantly already, and those moves are only now trickling through to temper economic growth.

While job gains and wages were both well above economists’ expectations, some analysts pointed out that they have been slowing over the course of 2022. Republicans seized on the data point as “Biden’s worst jobs report of the year.”

“The number was better than expected, but when you look at the broader picture in the U.S. labor market, demand for workers is slowing,” said Blerina Uruci, an economist at T. Rowe Price.

Central bankers have signaled that they will slow their pace of rate increases this month, which should give them more time to gauge how much more they need to do to restrain the economy. But many economists and investors on Wall Street expect that won’t be enough to save the economy from a Fed-induced recession.

Bank of America economists wrote this week that they foresee a downturn, flowing from “the headwinds of a weaker labor market, higher borrowing costs, tighter credit standards and weaker balance sheets.”

If the job market continues to sprint rather than slowing to a jog, the recession scenario looms more likely — a possibility White House officials largely dismiss, but one that Fed officials have acknowledged.

“I do continue to believe that there’s a path to a soft or softish landing,” Mr. Powell said this week. “To the extent we need to keep rates higher longer, that’s going to narrow the path to a soft landing.”