Federal Reserve officials spent much of 2022 and 2023 worried that the job market was too strong to be sustainable. Employers were racing to snap up a limited supply of workers, the logic went, leading to rapid wage gains that would eventually prod those companies to raise prices to cover their labor costs.
But instead of viewing rapid job gains as a potentially inflationary problem, the Fed has recently embraced them.
That is because strong hiring has come alongside a marked pickup in labor supply. Immigration has been much stronger than expected, and millennial men and women in particular are trickling into the labor force, enabling companies to hire without having to compete too fiercely for employees. Wage growth has been strong but not gangbusters, and inflation has cooled across a range of purchases, including those in service categories that are typically sensitive to labor costs.
Data released Friday showed that a lot of those trends persist. Hiring was very strong in March, and that wages climbed at a solid clip but continued to moderate somewhat on an annual basis. Average hourly earnings climbed by 4.1 percent last month compared to a year earlier, a tick down from 4.3 percent in February.
Overall labor force participation picked up slightly, meaning that a greater share of adults were working or looking for jobs, and employment among foreign-born workers continued to climb — a hint that immigrants may have accounted for some of the solid job increase.
The question now is how long policymakers will remain willing to tolerate such strong hiring without worrying that it will cause consumer demand, economic growth and inflation to pick back up. Job gains at the pace seen in March is faster than what most economists think is sustainable, even accounting for increasing labor supply.
But in recent speeches, central bankers have mostly signaled comfort with the vigorous labor market.
The job market is “strong but rebalancing,” Jerome H. Powell, the Fed chair, said in a speech this week. He noted that job openings had come down and that employers were reporting in surveys more ease in hiring.
A balanced but robust job market is good news for the Fed. If businesses are managing to find workers to hire, it means the economy can grow at a solid pace without overheating and generating a lot of inflation. And that means that the Fed can squeeze the economy a little bit with higher interest rates — something it is doing to wrestle inflation under control — without slamming on the brakes.
In fact, the recent surprising jump in worker supply is a big reason that the central bank might pull off a “soft landing,” in which it sets the labor market down gently and without causing a painful recession. Mr. Powell noted this week that immigration was a big reason that the economy blew through forecasters’ expectations for growth last year without generating inflation.
In fact, price increases cooled from 6.4 percent headed into the year to 3.3 percent at its conclusion, even as consumer spending consistently beat predictions.
“Our economy has been short labor, and probably still is,” Mr. Powell said, but immigration “explains what we’ve been asking ourselves, which is, ‘How can the economy have grown over 3 percent in a year where almost every outside economist was forecasting a recession?’”
Still, the current pace of jobs growth is strong even once rapid immigration is accounted for, which could keep Fed officials wary that the economy is still at risk of overheating if hiring continues at this pace.
Economists think that as immigration adds to the labor supply, job growth can remain strong without overheating the economy. A Brookings Institution analysis recently estimated that employers could add 160,000 to 200,000 jobs per month this year without a big risk of wages spiking and inflation rising. Without all of the immigration, that would have been more like 60,000 to 100,000.
And some Fed officials have already been questioning whether the central bank should cut rates at a time when inflation is proving stubborn and the economy looks like it might be heating back up.
Fed policymakers have been suggesting for months that they could soon cut borrowing costs, which are now set to about 5.3 percent. But as inflation has hit a sticking point after months of deceleration, investors have been steadily pushing back their expectation for when that might happen, and now expect the first move in only June or July.
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, even suggested this week that if price increases get stuck, it may make sense to leave interest rates at the current high level all year. While Mr. Kashkari does not vote on policy in 2024, he does have a seat around the discussion table at rate-setting meetings.
“If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all,” Mr. Kashkari said during an interview with Pensions & Investments, noting that the economy has a “lot of momentum.”
