Is it time for the hawks at the Federal Reserve to retreat as the tightness in the US labor market eases?

After more than a year of interest rate hikes, there are signs of a slowdown in the US labor market. The number of Americans quitting their jobs each month is not as high as it was during the same period last year. Some analysts believe that this may mean that the Federal Reserve no longer needs to worry excessively about the "wage-inflation spiral."

According to a report from the US Department of Labor on Tuesday, after seasonal adjustments, 3.8 million people quit their jobs in June, down from 4.1 million in May. This narrowed the quit rate from 2.6% in May to 2.4%. In November 2021 and April last year, the US quit rate reached a record high of 3%. However, the quit rate in June was still slightly higher than the average level of 2.3% in 2019, and it remained historically high.

The report on Tuesday showed that the number of unfilled job openings did not decrease as much. As of the last day of June, there were 9.6 million job openings, slightly lower than in May. This means that there were 1.6 job openings per unemployed person, which, although not as high as the record high of 2.1 in May last year, is still much higher than the average level of 1.2 in 2019.

Since the outbreak of the COVID-19 pandemic, the ratio of job openings to the unemployment rate in the United States has always been a focus of attention for the Federal Reserve. Policymakers believe that a reduction in job openings may help cool down the inflation caused by wage increases without causing a corresponding increase in the unemployment rate.

Some analysts believe that, at least under the current circumstances, the quit rate may more accurately describe the state of the job market. The decrease in the number of people quitting their jobs indicates that the job market may be closer to the level of calmness that the Federal Reserve deems sufficient than what the number of job openings suggests. If this is true, then the Federal Reserve may not feel the need to raise interest rates again.

How does the quit rate reflect changes in the US labor market?

Looking at different industries, the quit rate is still relatively high compared to before the pandemic in some industries. For example, in the leisure and hospitality industry, the quit rate in June was 5%, while the average growth rate in 2019 was 4.6%. In the private education and healthcare sector, the growth rate was 2.3%, compared to an average of 1.9% in 2019. Both of these industries are "high-frequency contact between people" industries, which experienced a sharp decline in employment during the COVID-19 outbreak, and employers later found it difficult to rehire workers.

Another way to observe the quit rate is to divide it into low-wage, medium-wage, and high-wage private sectors based on total employment. In June, the quit rate for the lowest-income group, including employees in the leisure and hospitality industry and the retail industry, was 3.7%, which was 0.2 percentage points higher than the average level in 2019. For the middle-income group, including workers in education, healthcare, and manufacturing, the quit rate was 2.1%, which was 0.3 percentage points higher than in 2019. The quit rate for the highest-income group, including industries such as finance and information, was 2.2%, which was 0.1 percentage points lower than in 2019.

Some analysts believe that this means that the labor market restructuring caused by the pandemic, especially the prospect of low- and middle-income workers finding better opportunities in other industries, has not yet materialized. For the Federal Reserve, this means that the job market may already be calm enough. **

Fed Officials Urge Caution in Avoiding Excessive Policy Tightening

On Tuesday, Atlanta Fed President Raphael Bostic urged the Federal Reserve to proceed with caution and avoid excessive tightening of monetary policy in the face of possible receding inflation. He stated:

We have made significant progress in our battle. The inflation rate is far below the highs we saw last year. Recent data is encouraging and suggests that we may see a continued decline.

He indicated that a rate hike may not be necessary at the next policy meeting in September.

He stated:

So far, the developments seem to align with the Fed's idea of a gradual economic slowdown, which is very promising. In terms of policy, I believe all these facts indicate that we need to be cautious, patient, and resolute.

Bostic mentioned that although his baseline view remains unchanged, the Fed will have a substantial amount of additional data before September, and if the data contradicts his expectations, he is willing to adjust his view on the upcoming meeting:

I believe we are currently in a phase where there is a risk of excessive tightening. We must keep this in mind, and if we can exercise appropriate caution, I think we have the opportunity to minimize the damage to employment.