Thu. Jan 27th, 2022

The U.S. unemployment rate dropped sharply in December, prompting investors to raise their bets that the Federal Reserve is moving fast to raise interest rates and withdraw the stimulus it set to support the economy at the onset of the pandemic.

Economists and investors expect the central bank to continue plans to tighten monetary policy despite unexpectedly slow job growth in December, when employers added 199,000 jobs, down 249,000 in November. The headline figure was far less than the 444,000 that economists expected.

However, the unemployment rate fell by another 0.3 percent last month to 3.9 percent, which put it within touching range of the pre-pandemic normal of 3.5 percent.

Falling unemployment has been accompanied by other strong data in the job report, including better-than-expected average hourly earnings, giving the Fed room to begin withdrawing from the unprecedented stimulus it deployed at the start of the pandemic to ward off economic collapse again.

“The Fed has decided to put more emphasis on the unemployment rate above the payroll number,” said Brian Rose, senior economist at UBS. “The fact that the unemployment rate is all the way up to 3.9 percent is really critical for the Fed.”

The figures contributed fuel to a sell-off in the treasury market as traders became more confident in their view that the Fed will raise rates this quarter. Yields on the 10-year benchmark U.S. government note rose 0.06 percentage points to 1.78 percent, the highest level since January 2020. Yields rise when bond prices fall.

The 10-year yield has shown its largest weekly increase in 28 months over the past five trading days. Bond sales hit treasuries across the yield curve, with yields on the five-year note rising to 1.51 percent, the highest since January 2020.

Chart showing deficits in non-farm payrolls since early 2020

U.S. stocks also sold, with investors dumping fast-growing technology companies considered the most vulnerable to rising rates. The technology-heavy Nasdaq Composite fell 1.1 percent, while the S&P 500 fell 0.5 percent.

President Joe Biden has focused on the decline in the unemployment rate and wage increases rather than the slowdown in the rate of appointment as proof of his administration’s successful policies, including trillions of dollars in stimulus and infrastructure spending.

“I would argue that Biden’s economic plan works and it brings America back to work, back on its feet,” he said in comments from the White House on Friday.

The data released by the Bureau of Labor Statistics on Friday showed another marginal improvement in the proportion of people looking for work or work.

Concerns about Covid and childcare issues are mainly to blame for holding back a more substantial return to work, which maintains the so-called labor force participation rate below where economists expected it would be at this stage of recovery.

It rose higher to 61.9 percent in December, higher than 61.8 percent in November, but still more than 1 percentage point ashamed of the pre-pandemic threshold.

Average hourly earnings growth increased by 0.6 percent from the previous month, for an annual profit of 4.7 percent.

The Fed is under pressure to tame rise inflation, which is now moving to the highest level in about 40 years. Fed Chairman Jay Powell recently said the central bank is closely monitoring wage growth for further evidence that inflation could turn into a more persistent problem.

Christopher Waller, a Fed governor, and James Bullard, president of the St. Louis Fed, are among those who rate increase in March, with additional increases later in the year. Most Fed officials see three rate hikes in 2022 and another five by the end of 2024.

Biden indicated on Friday that he wanted the Fed to eliminate inflation, saying he was confident the central bank “would ensure that price increases are not hedged over the long term”.

Additional post by Christine Zhang and James Politi

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