Federal Reserve officials received bad news in the September jobs report, which showed weak hiring and stagnating participation in the labor force — signs that the labor market will take time to heal. But with inflation high and wages picking up briskly, the risk is that central bank officials may not have the breathing room to wait for a full recovery.
The Fed has two jobs, fostering maximum employment and keeping inflation low and steady. In recent decades, inflation has been contained or even tepid, so central bankers have been able to give the labor market plenty of room to heal. But today, inflation has jumped higher, and rising wages suggest that employers may need to continue to lift prices to cover their costs. At the same time, millions of jobs are still missing compared to before the pandemic, and they are only trickling back.
Those trends could prod the Fed to make tough judgment calls about their policy help, which they had been preparing to pull back only slowly. Jerome H. Powell, the Fed chair, and his colleagues have been pumping $120 billion into markets each month and holding interest rates near zero to keep borrowing costs cheap and credit flowing easily, helping to stoke demand and encouraging employers to expand and hire.
Officials have signaled that they will soon begin to slow the bond purchases — something they could announce as soon as November based on progress in the labor market. The September jobs report probably will probably not derail those plans, which officials have said were based on cumulative job gains, and not a single month’s data. The United States has regained more than 17 million jobs since the worst depths of the pandemic.
Yet Fed policymakers have repeatedly promised that even as they pull back on bond buying, they will continue supporting the economy with low rates — their more traditional and more powerful tool — for as long as it needs their help. If rapid inflation looks poised to stick around and the labor market is taking a long time to heal, though, they may find themselves forced to lift rates sooner in the jobs rebound than they would like.
“This is not the situation that we have faced for a very long time, and it is one in which there is a tension between our two objectives,” Mr. Powell said during a recent public appearance. He later added that “managing through that process over the next couple years, I think, is the highest and most important priority, and it’s going to be very challenging.”
Central bank officials are hoping that jobs lost during the pandemic return soon, but progress in recent months has been stop and start. Employers added 194,000 jobs last month, disappointing compared with economist forecasts, which had called for half a million.
Inflation came in at 4.3 percent in August, far above the central bank’s goal, which is to average 2 percent over time.
The pop in prices in 2021 has been driven higher almost entirely by pandemic quirks. Strong consumer demand for refrigerators and computers has overwhelmed supply chains at the same time as coronavirus-tied factory shutdowns have delayed parts production. The combination has led to shortages for items as varied as rental cars and washing machines, pumping up prices.
Officials still expect the price pressures to prove temporary. But it has become increasingly clear that, while the drivers are mainly one-offs, they could linger for months. Shipping routes are struggling to catch up, pandemic outbreaks continue to force factory closures, and now a jump in raw goods prices threatens to keep price gains elevated.
The Fed is closely watching to make sure that longer-term inflation expectations remain at healthy levels. Should consumers and investors come to expect higher inflation, they might change their behavior, creating a self-fulfilling prophesy.
Some key gauges of consumer price outlooks have begun moving up. And Fed officials are also watching wage data, because when wages are climbing quickly and companies have to lift prices to cover their costs, it can set off a cycle that locks in rapid inflation.
Average hourly earnings climbed 0.6 percent in September from the month before, more than economists in a Bloomberg survey had expected.
That combination raises an unhappy possibility: The Fed might find itself under pressure to lift interest rates and cool off the economy before employment has fully rebounded.
There is little that a central bank can do to spur better port capacity or more apartments, but it could arguably calm demand by lifting interest rates. With fewer consumers buying condos, couches and lawn furniture, factories, homebuilders and cargo ships might catch up, helping to alleviate cost pressures.
But higher rates would also slow business growth and hiring, trapping the pandemic unemployed on the labor market’s sidelines. That’s why Mr. Powell and his colleagues are counseling patience, hoping to avoid overreacting to a price pop that will peter out.