US labor market data in focus

The Federal Reserve announced that it will cut interest rates this year, but the timing and the measure will depend as always on two unknowns, the inflation rate and the unemployment rate, or rather on the growth of the labor market. As always the Job Report, the report on the American labor market, due out today, will be crucial for interpreting the next moves of the American central bank. A kind of “thermometer” of monetary policy. And this is because employment growth is one of the two parameters on which the Fed makes its decisions, the other being inflation, which so far, obviously, has had the prevalence.

Inflation has slowed

In recent months, price growth has slowed down somewhat. The latest data has highlighted a slowdown to 3.9% from 4.6% previous and compared to the expected 4.3%, a far cry from the peaks reached in 2022, when the recovery of post-Covid activity, bottlenecks in supply chains and employment and wage growth had created upward pressure on prices .

And the Fed is thinking of cutting rates

The Federal Reserve has thus returned to think about a possible rate cut, having reached a peak. The minutes of the last monetary policy meeting confirmed this, but also reveal some uncertainty and the lack of uniformity of sales on the next steps.

But this time the Fed will also look at the situation on the labor marketto find the right balance between growth and inflation and thus determine the most appropriate level of interest rates.

The cautious observerswho base their expectations on what emerged from the December “dot plots”, the graphs of the preferences of the FOMC members, believe that this year the central bank will reduce rates by 75 points basis and which will start from mid-year. THE more optimism they are instead betting on an early cut in March and a reduction in the cost of borrowing by 150 points to 3.75-4%.

Which employment data will be satisfactory?

If in recent months the fight against inflation was an absolute priority, which translated into a rapid adjustment process to increase interest rates, for a few months now the emergency has been resolved and the Fed, after a phase of rate stability , has even opened up the possibility of a cut in the cost of borrowing in 2024.

Faced with inflation almost under control, attention has shifted to labor market, as an indicator of the state of the economy. A good data could in fact convince bankers that the time is ripe for a rate cut, but a given too strong it could even be harmful and suggest to the Fed to wait, because the pressures on the labor market could translate into wage growth and a new increase in the inflation rate.

The good news is that this time the range of expectations is wider which in the past months – fluctuates between 100 thousand and 250 thousand places of work – with the Fed already anticipating a possible rate cut in 2024 and the markets still being convinced that the central bank will start cutting rates in March and reduce the cost of money by 1.5 points to 3.75-4% before the end of the year. It is true that too strong data could reduce such optimistic expectations.