Today, the U.S. Bureau of Labor Statistics released employment data for nation-wide nonfarm payroll. It rose by 528,000 in the month of July, and the total unemployment rate for the country edged down to 3.5%.
Looking at the bigger picture of our economy and what that might mean moving forward, let’s take a look at the one entity that hands-down has the largest impact on money, markets, and the economy–the Federal Reserve.
The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy to achieve and balance three objectives: promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. In a nutshell, the overall objective of the Federal Reserve is to manage inflation and unemployment. While the recent release of positive labor news on nonfarm employment is certainly positive news for the labor market generally and its workers, it could highlight how the Federal Reserve plans to operate moving forward.
Since March 2022, the Federal Reserve has been raising the Effective Federal Funds Rate in an attempt to combat inflation, which recently came in at an astounding 9.1% in June 2022 when measured with the U.S. Bureau of Labor Statistics’ Consumer Price Index. With inflation on the loose, the Federal Reserve has one major tool to combat it, which is to raise interest rates to make money more expensive, and therefore slow down the economy.
Starting at a targeted rate range of 0%-0.25% in March 2022, the Federal Reserve has since increased rates to a new range of 2.25%-2.5% as of July 2022. While nominally a small difference, the real impact that these rate adjustments will have on the larger economy could be significant once accounted for by the markets. Have you taken a look at 30-year home mortgage rates lately?
The positive nonfarm employment data can serve as an indication of what the Federal Reserve will do next. With unemployment drawing down, which is a sign of a strengthening economy, it could give the Federal Reserve room to increase rates even further until raising rates is seen to have a negative impact on employment data. Afterall, the Federal Reserve has historically been more reactive than proactive when it comes to enacting monetary policy. The Federal Reserve last raised rates by 0.75% in July, and with the strengthening of the labor market, one could make the argument that we could expect a similar rate hike in the coming months.
I suspect that the positive trend in employment data will embolden the Federal Reserve to push interest rates even higher, which will serve to slow down our economy into the near future. In this environment, it could be a positive outlook to keep cash, pay down debt, and prepare for a favorable buying opportunity in the markets.
