The March employment report suggests the Fed has the labor market right where it wants it, and is likely to stay on course to raise interest rates gradually this year to prevent the economy from overheating.
Joblessness fell to its lowest level in almost a decade, while employers added jobs and raised wages at a sustainable pace, all developments Fed officials are likely to welcome.
The unemployment rate fell to 4.5% last month, from 4.7%, in February, dipping below Fed officials’ estimate of its long-term level ahead of schedule. In forecasts released last month, they had projected joblessness would reach 4.5% by the end of this year.
Moreover, unemployment dropped for all the right reasons. The number of employed people rose, the number of unemployed people fell, and the share of adults holding or seeking jobs — the labor-force participation rate — held steady.
Earnings were up 2.7% in March from a year before, on par with February’s 2.8% annual rise. This could mean the labor market has grown tight enough to prompt employers to keep boosting wages and discouraged workers on the sidelines to start dusting off their résumés.
Hiring slowed sharply in March, but that doesn’t mean it is freezing or that the economy is slowing. Employers added 98,000 workers to their payrolls last month, down from gains exceeding 200,000 in each of the previous two months. But Fed officials prefer to look beyond one-month swings, and are likely pleased to see job gains averaged about 178,000 a month over the first quarter — a robust pace.
Also, the March hiring decline is likely a blip. Many economists had predicted a slowdown because of the warmer-than-usual weather that led to strong construction job gains in January and February, a big storm in March that likely dented the numbers, and the federal hiring freeze announced by President Donald Trump.
Chairwoman Janet Yellen said in a speech in March that the labor market needs to add between 75,000 and 125,000 jobs a month to absorb the growth in the labor force. The March number lies nearly smack in the middle of that.
San Francisco Fed President John Williams in January estimated the economy needed to add about 80,000 new jobs a month to maintain its current strength. If employers expanded their payrolls too fast, he said, it could risk causing the economy to overheat.
“Last year job gains averaged about 180,000 a month,” he said. “That’s more than twice as fast as we need to keep up with the trend in labor force growth and, quite honestly, is unsustainable in the long run.”
After spending years trying to jump-start a moribund economy, Fed officials are now trying to keep it running smoothly, preventing it from growing too fast or too slowly.
They raised the Fed’s benchmark short-term interest rate in March by a quarter percentage point to a range between 0.75% and 1% and penciled in two more increases this year.
The latest snapshot of the labor market likely leaves those plans intact for now.