Federal Reserve officials are likely to closely watch employment numbers on Friday for further signs that the economy’s momentum is slowing, an important consideration for them in deciding whether to lift interest rates further.
Fed policymakers have sharply increased borrowing costs over the past year and a half, to a range of 5.25 to 5.5 percent, from near-zero as recently as March 2022. Those moves were meant to slow the economy by making it more expensive to borrow to buy a house, purchase a car or expand a business.
Now, central bankers are contemplating whether they need to raise interest rates one more time. Policymakers had previously forecast another move before the end of 2023.
Most investors do not expect any increase to come at the Fed’s next meeting on Sept. 19-20, but officials have not ruled out a move. And even if central bankers leave rates unchanged in September as markets expect, policymakers will release a fresh set of economic projections showing how they expect the labor market, inflation and interest rates to shape up over coming months and years.
That’s where incoming data reports — including the fresh jobs figures — could matter. Employers have been hiring at a surprisingly steady clip this year, given how much the Fed has raised interest rates. Policymakers will be gauging whether that trend continues to slow.
And Fed officials will devote attention to how quickly wages are climbing.
Central bankers have de-emphasized pay gains as a potential driver of inflation in recent months, suggesting instead that rapid wage growth probably signals that workers are trying to catch up with past inflation. Even so, many standard economic models suggest that if pay is climbing steeply, it could be hard to fully snuff out rapid inflation. Companies facing heftier labor costs will probably try to charge more to protect their profits, and workers who are earning more may find themselves capable of and willing to pay higher prices.
Jerome H. Powell, the Fed chair, recently highlighted slowing jobs growth, stable hours worked and slowing pay gains across a range of measures as signs that the labor market is getting into a better balance.
“We expect this labor market rebalancing to continue,” he said, speaking last week in Wyoming. But, he warned in the speech, the Fed is watching to make sure the economy doesn’t heat back up in spite of higher interest rates, a development that could mean that borrowing costs need to go higher.
“Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response,” Mr. Powell said.