The latest jobs numbers are likely to make the Federal Reserve’s job easier, at least for now.
For most of last year, the Fed has found itself in wait-and-see mode as it assessed the economic fallout from the sweeping policy changes imposed by President Trump that rewired global trade and upended the labor market.
The U.S.-Israel war with Iran threatens to thrust policymakers further into limbo. By driving up energy prices, the war is likely to make inflation worse, but it could also weaken the economy. That could put the two sides of the central bank’s mandate — stable prices and full employment — in tension with one another.
The March jobs report, however, suggests that the labor market remains relatively healthy. Job growth beat expectations by a wide margin, and the unemployment rate — which Fed officials are watching particularly closely right now — ticked down to 4.3 percent.
That stability should give policymakers some breathing room to focus on the inflation side of their mandate, which is likely to mean that they will hold interest rates in place for now.
The Fed was already expected to hold rates steady at its next meeting, at the end of this month, and investors have steadily pushed out their estimate for when, or even if, policymakers will cut rates again. The jobs numbers added to investors’ doubts about future rate reductions: The yield on the two-year Treasury note, which is sensitive to changes in interest rate expectations, rose sharply after the report was released.
Still, the jobs data only reflects the state of the labor market through early March, when the war was just beginning to roil global energy markets. Since then, the conflict has further snarled supplies and lifted commodity prices, such as those for gasoline and fertilizer. Shipping costs have also moved up.
Overall inflation in the coming months will be higher as a result. Consumers, facing higher expenses for some goods, are also expected to pull back on spending to some extent.
A prolonged conflict would amplify the economic impact. Officials are concerned about the extent to which consumers retreat, given that consumer spending fuels roughly two-thirds of the country’s economic growth. Businesses, still working through last year’s tariff shock, have slowed hiring. They have yet to shed workers in droves, though anything that further squeezes their profit margins could change that.
But growth and the labor market are not policymakers’ only concerns. They are also worried about inflation, which has been running above their 2 percent target for roughly five years. That fear has complicated whether officials can avoid reacting to the forthcoming pickup in prices, a strategy they have pursued in the past on expectations that a resulting hit to growth will outweigh any lasting inflation issues.
“You can have a series of these supply shocks and that can lead the public generally — businesses, price setters, households — to start expecting higher inflation over time. Why wouldn’t they?” Jerome H. Powell, the Fed chair, said at an event this week.
Despite this risk, Mr. Powell did not convey any immediate urgency to take action, saying instead that the Fed’s policy was “in a good place for us to wait and see how that turns out.”
John Williams, president of the Federal Reserve Bank of New York and a close ally of Mr. Powell, echoed that view this week as he warned that the conflict “could result in a large supply shock with pronounced effects that simultaneously raises inflation — through a surge in intermediate costs and commodity prices — and dampens economic activity.”
While Mr. Williams acknowledged that some of this had “begun to play out already,” he said he expected the burst in inflation stemming from the war to prove short-lived.
He forecast that the unemployment rate would tick down from its current level of 4.4 percent and for inflation to end the year around 2.75 percent. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, stood at 2.8 percent as of January.
Ben Casselman is the chief economics correspondent for The Times. He has reported on the economy for nearly 20 years.
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