WASHINGTON, September 20 — The Federal Reserve is under renewed pressure to raise interest rates after two economic reports released in early September, according to an analysis by Dr. Uric Dufrene, Sanders Chair of Business and Special Assistant to the Chancellor for Talent and Workforce Development at Indiana University Southeast. The Bureau of Labor Statistics reported that the economy added 162,000 jobs in August, far exceeding expectations and up sharply from a revised 21,000 in the prior month. Manufacturing payrolls added 16,000 jobs and construction added 22,000.
Food services and drinking places saw the largest increase, while health care and social assistance continued to add jobs. Revisions showed June and July payrolls were 55,000 higher.
Household survey stronger still
The household survey was even stronger. The labor force expanded by 683,000 and employment rose by 569,000, reversing prior declines. The labor force participation rate rose from 61.4% to 61.6%.
The unemployment rate remained flat at 4.1%, but the rate for high school graduates rose from 4% to 4.7%, above the national average. The rate for bachelor’s degree holders stayed at 2.7%.
Dufrene’s analysis, released in early September, holds that the strong jobs report became a factor in the Fed’s upcoming decision. The CPI report released last Friday may have been the tipping point.
Inflation picture splits
Headline CPI rose 4/10ths of a percent in one month, with energy prices linked to the ongoing Iran War a major contributor, keeping the annual inflation rate at 3.4%. Core CPI, which excludes food and energy, continued to decline year-over-year to 2.4%, closer to the Fed’s preferred 2% target. Dufrene writes that the Fed will now more than likely increase rates at its next meeting.
He adds that equity markets might even reward the increase, as opposed to the usual declines when the Fed hikes rates, because a Fed signal of commitment to fighting inflation could boost both stocks and bonds. He notes that Chairman Warsh muddied the waters about his commitment to fight inflation back in July, and a Fed increase this time would provide a boost to inflation-fighting hawks and welcome relief to both stock and bond markets.
What to watch next is the Fed’s next meeting and whether the inflation-fighting signal Dufrene describes materialises in the rate decision.
