The Fed will still likely continue to raise interest rates to combat inflation and prevent the economy from overheating.
The data on the US Nonfarm Payrolls revealed that 223,000 jobs were created in December 2022, which was better than the expectation of 203,000 but lower than the total of 263,000 jobs produced in November 2022. The updated statistic for unemployment in November 2022 was 3.6%, however it dropped to 3.5% in December 2022, which was lower than the widely accepted estimate of 3.7%.
While the Federal Reserve is attempting to restrict economic growth, an improvement in the labor market as measured by a decline in the unemployment rate suggests that the supply and demand for jobs are becoming more balanced. The Federal Reserve has been unable to slow down hiring or reduce inflation despite interest rate increases.
As a response to the rising cost of living crisis in the United States, the Federal Reserve has been gradually increasing interest rates since March of last year. In 2022, the Fed increased interest rates seven times. While inflation has decreased from its June high of 9.1%, it still sits at 7.1%, considerably above the Fed’s 2% goal rate, and is forecast to continue high through 2023.
Every first Friday of each month, the US Bureau of Labor Statistics publishes a report on job growth in the United States, excluding employment in farming, government, and private households.
Data interpretation simplified
Despite the seemingly counterintuitive nature of the situation, the Federal Reserve may still need to raise interest rates due to the positive employment data seen in the latest jobs report. The Fed typically considers cutting rates when unemployment is high, as this can help stimulate economic growth. However, with the labor market currently performing well and people in employment able to spend and potentially drive up inflation, the Fed may decide to keep rates at their current levels. This highlights the delicate balance the central bank must strike in managing monetary policy.
In contrast to the jobs data, the technology industry has recently made significant layoffs in employment. However, the technology industry only accounts for a small portion of total employment, and the most recent survey conducted by the government uncovered significant expansion in the fields of healthcare, construction, social assistance, and leisure and hospitality.
How did markets react?
Following the report, stock market futures increased as investors sought indications that the job market was cooling and bringing inflation down as well.
In the cryptocurrency markets, Bitcoin (BTC) increased after spending the most of the previous month fluctuating between $16,500 and $17,500 to break even at $16,791. Cardano (ADA) increased 1.91% to $0.2716, while Ethereum’s (ETH) price remained largely unchanged at $1,251. At the time of writing, the price of Bitcoin is at $16,950, trying to break the $17,000 resistance.
Contrary to expectations, financial markets should have experienced a decline rather than a surge as the narrative for the Federal Reserve to raise interest rates continues with the recent data report. It is important to remember that markets are inherently nonlinear and chaotic, and therefore can sometimes send false signals. As investors, it is necessary to rely on probabilities rather than certainties when making decisions in the market.”
In general, the Fed may consider raising interest rates when the economy is strong and unemployment is low, as this can help to control inflation and prevent the economy from overheating. On the other hand, the Fed may consider cutting interest rates when the economy is weak and unemployment is high, as this can help to stimulate economic growth and encourage borrowing and spending.
The Fed may need unemployment to go up in order to justify cutting interest rates if it determines that the economy is weak and in need of a boost. However, it is worth noting that the Fed’s decision-making process is complex and takes into account a wide range of economic indicators, not just the unemployment rate.