Analysis: Jobs Report Keeps December Rate Increase on Track

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Job seeker filled out a job application at a Miami Lakes, Fla., job fair earlier this year.

Job seeker filled out a job application at a Miami Lakes, Fla., job fair earlier this year.


Photo:

Lynne Sladky/Associated Press

The November employment report should keep the Federal Reserve on track to raise interest rates at its meeting in less than two weeks and to move toward a cautious approach to rate increases next year.

The job market remained healthy overall, with low unemployment and steady wage growth, justifying an expected rate rise this month.

But hiring cooled a bit, easing concerns the economy might be overheating and supporting a wait-and-see strategy that could lead to slower rate increases next year.

The unemployment rate held steady at its half-century low of 3.7% in November while employers added 155,000 jobs, a touch below average monthly gains of 170,000 jobs over the past three months.

The November payroll gain was still well above the 100,000 or fewer jobs many economists expect is needed to keep up with the growth of the working age population. The report showed gains spread across industries.

How the Federal Reserve’s unemployment projections have performed over time
The Fed missed the rapid rise of unemployment during the recession and has underestimated how far it would fall for much of the expansion.
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Notes: The Federal Reserve releases economic projections every quarter. Projections for the unemployment rate are for the fourth quarter of the year. Unemployment figures are seasonally adjusted.
Sources: Federal Reserve, Labor Department, St. Louis Federal Reserve
Graphic: Soo Oh/The Wall Street Journal

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Fed officials believe the economy is on a strong footing but is likely to slow in the coming year, a transition they are monitoring closely. They have for years emphasized their reliance on the freshest economic data, but have doubled down on that message in recent weeks.

“The most likely path for the economy is positive, although some tailwinds that have provided a boost are fading, and we may face some cross currents,” Fed governor Lael Brainardsaid in a speech Friday, after the employment report was released. She said a path of gradual interest-rate increases remains “appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.”

Potential economic headwinds include slower global growth, trade and fiscal policy, plus the cumulative effect of the Fed’s own policy moves over the past two years. Financial markets have turned more volatile in recent weeks, raising the cost of borrowing for some businesses.

Notably, however, gloomy investor sentiment hasn’t shown up in most U.S. economic data.

Fed officials want to see hiring slow enough to stabilize unemployment at its current, historically low levels because it would tamp down worries that growth could become unsustainable, risking overheating. At their September meeting, all Fed officials expected the unemployment rate to end the year at 3.7% or 3.8%.

President Trump has put the Federal Reserve at the middle of the latest drop in the markets, saying the “Fed has gone crazy.” WSJ global economics editor Jon Hilsenrath explores three reasons why the Fed is raising interest rates. Photo: Getty Images.

The November report provided continued evidence of a slow but steady rise in wage growth. Average hourly earnings of private-sector employees rose 3.1% in November from a year earlier, holding at its highest levels in roughly a decade.

If job growth slows in the months ahead, an important question will be whether it reflects signs of reduced demand for workers, or if it suggests employers are running into greater trouble finding qualified workers at prevailing wages.

Fed officials would welcome continued increases in the share of Americans who are looking for work because it would show the economy isn’t at risk of overheating and is instead healing years of damage from sluggish demand. The labor-force participation rate held steady at 62.9% in November, with the labor force adding 133,000 people holding or seeking jobs.

For years, officials knew they wanted to lift interest rates higher from very low, postcrisis levels, and the main question was how fast they should go.

Now, after raising rates eight times in the past three years—and likely once more in December—there’s greater uncertainty about both the pace and the destination. An increase this month would lift the Fed’s benchmark federal-funds rate to a range between 2.25% and 2.5%.

If the economy stays strong, the Fed can proceed more confidently with continued, gradual rate rises. But if it slows, that could fuel more doubts about how quickly to move.

While recent economic data and surveys point to steady growth, inflation has shown no signs of accelerating since the summer after holding much closer to the Fed’s 2% target this year. Consumer prices rose 2% in October from a year earlier and so-called core prices, which exclude food and energy items, rose 1.8%, according to the Fed’s preferred gauge.

Write to Nick Timiraos at nick.timiraos@wsj.com