US unemployment rate drops to 3.9%

Economists and investors expect the Fed to press ahead with plans to tighten monetary policy and raise interest rates

The US unemployment rate dropped significantly in December, prompting investors to increase their bets on the Federal Reserve moving quickly to raise interest rates and withdraw the stimulus it put in place to support the economy at the start of the pandemic.

Economists and investors expect the central bank to press ahead with plans to tighten monetary policy despite unexpectedly slow jobs growth in December, when employers added 199,000 jobs, a decline from 249,000 in November. The headline figure was well short of the 444,000 expected by economists.

However, the unemployment rate fell by another 0.3 per cent last month to 3.9 per cent, putting it within touching distance of the pre-pandemic normal of 3.5 per cent.

Declining unemployment chimed with other strong data in the jobs report, including better than expected average hourly earnings, giving the Fed leeway to embark on the withdrawal of the unprecedented stimulus it deployed at the start of the pandemic to stave off economic collapse.

The figures added 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.

President Joe Biden focused on the drop in the unemployment rate and wage gains rather than the slowdown in the pace of hiring as evidence of his administration's successful policies, including trillions of dollars of stimulus and infrastructure spending.

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

The Fed is under pressure to tame soaring inflation, which now hovers at the highest level in roughly 40 years. Jay Powell, the Fed chairman, recently said the central bank was watching wage growth closely for further evidence that inflation could morph into a more persistent problem. – Copyright The Financial Times Limited 2022

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