US labor market seen cooling, but not nearly enough for Fed

Bloomberg

US hiring likely continued to moderate at the start of the year, though still-solid wage growth, an unemployment rate near historical lows and high vacancies are seen stiffening the Federal Reserve’s resolve to keep rates elevated for some time.
Friday’s jobs report is expected to show payrolls rose by 190,000 in January. Economists also estimate that average hourly earnings rose 0.3% for a second month and the unemployment rate slightly ticked up from a five-decade low.
While the payrolls gain would be the smallest advance in just over two years, it illustrates resilient labor demand that favors a soft landing for the economy as long as inflation keeps slowing.
“You’re trying to thread a needle,” said Brett Ryan, senior US economist at Deutsche Bank AG. “If it’s really weak data, then you worry about recession,” but too strong “it implies a more hawkish outlook for the Fed.”
Fed policymakers slowed the pace of interest-rate increases and also indicated further tightening is in store. In their statement assessing the economy, central bankers said that “job gains have been robust in recent months” and inflation, while elevated, has settled back.
“I continue to think that there’s a path to getting inflation back down to 2% without a really significant economic decline or a significant increase in unemployment,” Fed Chair Jerome Powell said at a press conference after the central bank raised its benchmark rate a quarter point.
Payroll estimates in the Bloomberg survey range from gains of 130,000 to 320,000.
Even with big-name companies including Microsoft Corp. and Goldman Sachs Group Inc. announcing thousands of layoffs in recent months, overall job losses remain historically low. Economic activity may be cooling but many firms are still seeking to hire — and doling out higher wages to lure talent and retain employees.
Though the Fed is moving closer to a pause in its policy-tightening campaign, how long interest rates stay high depends in large part on how long it takes for the labor market to turn and wage growth to soften.
While data out earlier this week showed a softening in wage and benefit growth at year end, job openings unexpectedly jumped above 11 million. The gain was primarily driven by a surge in vacancies at accommodation and food services and retail trade, two areas where the Fed is particularly worried about wage growth.
The ratio of openings to unemployed, a figure Powell has repeatedly referenced, rose to a near-record 1.9 in December.
The Fed is still hopeful it can achieve a “soft landing,” a scenario in which it can tame inflation while avoiding a surge in unemployment. While some economists expect that the aggressive tightening will ultimately tip the US into a recession, a slower inflation rate and steady hiring could help the economy avoid one.

Hours and Wages
Some economists say hours worked may edge higher in January, which could restrain average hourly earnings growth. That said, some workers will get a boost in the coming months from annual pay raises as well as routine resets of minimum wages in certain states.
Deciphering the upcoming jobs report will be further complicated by a variety of revisions and data updates.