Wall Street sees smaller 225,000 increase in U.S. jobs in February. A much larger gain might spur stiffer Fed rate hike.

While such an increase would be historically strong, it would mark a bigger downturn from the originally reported 517,000 spike in employment in January.

Fed response

The Federal Reserve was concerned by a strong jobs report in January as well as other signs that the economy may indeed be regaining strength in early 2023. under control.

Economists say another big increase in new jobs – 300,0000 or more – will add to the Fed’s worries.

Such an increase could also prompt the Fed to raise its benchmark short-term interest rate by half a percentage point when senior officials convene in Washington in two weeks.

Until recently, Wall Street was expecting a modest quarter-point rate hike.

Higher borrowing costs slow down the economy, and the more they have to go to reduce inflation, the more likely America is to sink into recession.

unemployment rate

The percentage of Americans out of work fell to 3.4% in January and matched a 54-year low, another sign of how tight the labor market is.

Economists expect unemployment to remain at 3.4%. If it falls further, the unemployment rate will touch its lowest level since 1953. It will also be a wake-up call for the Fed.

rapid pay rise

Workers’ wages have risen sharply over the years as companies have had to compete for employees during a time of great labor shortage.

The Fed worries that higher wages could trigger a vicious “wage-price” spiral that keeps upward pressure on prices and makes inflation harder to get under control.

Average hourly wages are projected to increase 0.4% in February. This would push last year’s growth to 4.8% from 4.4% in the prior month.

The central bank wants to see annual wage growth return to pre-pandemic levels of 2% to 3% a year. Annual growth in wages in March 2022 reached a four-decade high of 5.9%.

jobs wild card

Some economists report an increase of 517,000 in new jobs at face value in January.

For one thing, the government introduced new seasonal adjustments, as they do every year, which could have exaggerated employment growth.

The weather was also unseasonably warm and this could boost job gains in industries such as construction, retail, leisure and hospitality.

Indeed, relatively mild winter weather in February could do just that and help produce another stronger-than-expected employment report.

Finally, the government’s preliminary survey of job growth has shown greater volatility due to lower response rates.

Take January only. Only 44% of businesses responded to the government’s employment questionnaire on time, compared to 60% in January 2020. Fewer responses may increase — or decrease — overemployment.

“The low response rate to the BLS’ establishment survey makes preliminary estimates of job growth in any given month less reliable,” said Richard Moody, chief economist at Regions Financial.

Most of the businesses surveyed eventually provide updates on their monthly employment levels and there may be sharp revisions to prior data.

Economists on Wall Street and the Fed are watching closely to see whether January’s 517,000 increase in jobs turns out to be too low.

The size of the Fed’s next interest rate hike may depend on it.