Federal Reserve officials have said that they are looking for the labor market to cool as they assess how much more they need to do to slow the economy, and the job report on Friday suggested that policymakers may still have a ways to go.
Employers hired ravenously in January, the jobless rate dipped to a level not seen since 1969, and the average workweek ticked up — all signs that demand for labor is booming.
At the same time, though, wage growth continued to moderate. Average hourly earnings climbed by 4.4 percent over the year, more than forecast in a Bloomberg survey of economists but less than 4.8 percent in December. Pay growth has been decelerating for months, though it remains faster than is typical and is still notably quicker than the pace that Fed officials have at times suggested would be consistent with their 2 percent inflation goal.
Fed officials raised interest rates by a quarter-point this week, and as Wall Street is now waiting to see how high officials will ultimately push borrowing costs and how long they will stay elevated. Taken as a whole, the jobs data offered something of a mixed bag for the Fed, which could choose to focus on either the slowing pay gains or the rapid hiring and falling unemployment rate.
But officials have recently stressed that labor demand remains too strong, so the fresh hiring figures offered little comfort on that front. And policymakers may question whether wage growth can continue to slow with unemployment so low and employers so eager to snap up workers.
“The risks are now that they might need to do more,” Kathy Bostjancic, Nationwide’s chief economist, wrote in a note following the release.
Central bankers usually cheer on workers when they get jobs and raises, but they are worried that today’s strong job market could stop inflation from cooling completely. When companies increase pay rapidly to compete for a limited pool of workers, they may charge more to cover their climbing labor bills. Beyond that, higher incomes could prompt consumers to spend more, keeping demand strong.
“The labor market continues to be out of balance,” Jerome H. Powell, the Fed chair, said earlier this week.
Mr. Powell said this week that the Fed would be watching economic data ahead of its next policy meetings, in March and May. And he underlined that if the labor market did not cool more, inflation could remain rapid in the services sector, in which labor is a major cost.
“My own view would be that you’re not going to have a — you know, a sustainable return to 2 percent inflation in that sector without a better balance in the labor market,” he said at his news conference. “And I don’t know what that will require in terms of increased unemployment.”