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📝U.S. Jobs Growth Not At A Sustainable Pace: Wells Fargo

The July employment report increasingly stands apart from a wide range of indicators that show labor market conditions weakening. Yet it is arguably the most integral in forming Fed officials' assessment of the labor market.

In the 2010s expansion, a blowout nonfarm payrolls report typically would have been a welcome development for monetary policymakers at the Federal Reserve. The current situation facing the FOMC is much more nuanced. Chair Powell and company need job growth to slow enough that the "extremely tight" labor market cools but not so much that unemployment rises materially and the economy is pushed into a painful recession. Employment growth of more than half a million new jobs per month is clearly not a sustainable pace of job creation at this point in the cycle. Perhaps even more concerning for the Federal Reserve is that wage growth looks to be increasingly sticky around 5.0%-5.5% on an annualized basis, which is roughly a percentage point or two above what would be consistent with the Fed's 2% inflation mandate.

Threading this needle will be difficult, and we suspect the FOMC will be inclined to put more weight on the price stability half of its mandate if push comes to shove. At least a 50 bps rate hike at the September 20-21 FOMC meeting seems likely at this point in time, and yet another 75 bps hike could be in store if inflation over the next two CPI reports shows no signs of trending lower. Additional monetary policy tightening should eventually slow nonfarm payroll growth in the months ahead, and our base case still includes a mild recession that begins early in 2023. - Wells Fargo



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