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The Fed is looking for a slowdown in the labor market. It just got one.

Federal Reserve officials are keeping a close eye on the labor market and considering when and whether they can cut interest rates this year. Friday’s jobs report provided the first evidence of the kind of moderation they were hoping for.

Average hourly wages, a measure of wage growth, rose 3.9 percent in April compared to a year earlier. That was both cooler than the previous reading and slightly cooler than the 4 percent forecast by economists.

The slowdown came as job growth slowed to 175,000 over the month, the unemployment rate rose slightly and average weekly hours worked fell slightly. The overall picture was one of a labor market that remains solid but is beginning to slow – exactly what officials are saying The Fed was looking.

Central bankers generally welcome a strong labor market: one of their two mandates from Congress is to promote maximum employment. But when inflation is high, as it has been since 2021, officials worry that a hot labor market could help keep price increases high. As employers compete for workers and pay more, they are also likely to try to charge more, the theory goes. And workers who earn slightly higher salaries may have the wherewithal to pay more without cutting corners.

“The more jobs reports you get,” “the more certain we can be that the economy isn’t overheating,” Federal Reserve Bank of Chicago President Austan Goolsbee said in an interview with Bloomberg Television. Mr. Goolsbee is not voting on monetary policy this year.

At the Fed’s policy meeting this week, officials Interest rates remained at 5.3 percent, the highest level in more than two decades. The central bank expected to cut interest rates several times at the start of 2024, but those plans were delayed by surprisingly stubborn inflation.

Investors are now expecting two interest rate cuts before the end of the year. Investors have generally lowered the likelihood of rate cuts in recent months, but they seen a slightly higher chance that the Fed will cut interest rates significantly after Friday’s jobs report. Stock indexes rallied following the report as investors welcomed the more dovish data.

While inflation is the main factor determining when and how much to cut borrowing costs, Federal Reserve Chairman Jerome H. Powell made clear this week that central bankers are also watching what happens to hiring and salaries .

Mr. Powell repeatedly emphasized that the Fed was not specifically targeting wage growth when setting policy, but also suggested that wage increases may need to slow even further for inflation to fall sufficiently and sustainably – meaning the numbers from A problem could be a welcome development on Friday.

“We’re not targeting wages; We are targeting price inflation,” he said. If the goal is to cool the economy, he said, “part of that will probably involve gradually tapering wage increases to more sustainable levels.”

Mr. Powell has laid out several ways tariffs could move forward, and the labor market plays a role in some scenarios.

A combination of persistent inflation and continued strength in the labor market could prompt the Fed to keep interest rates unchanged for longer, he said. However, if inflation cools again, that would pave the way for interest rate cuts, Powell said. This could also be an indication that the labor market is unexpectedly cooling down.

Friday’s slight increase in unemployment was probably not enough to reach that standard. Mr. Powell pointed out this week that the Fed would need more than just a small increase in unemployment to feel that the job market is bad enough to justify lower interest rates.

“It would have to be meaningful and grab our attention and lead us to believe that the labor market is actually getting significantly weaker so that we can respond to it,” he said, adding that it was an increase of a few tenths of a percentage point in the unemployment rate probably wouldn’t reach that standard. “It would be a broader thing,” he said.

Michelle Bowman, a Fed governor who tends to favor higher interest rates than her colleagues, stressed after the report that the job market is still strong.

“While we have seen signs of better balance in the labor market, recent employment reports indicate a continued tight labor market,” Ms. Bowman said, noting that unemployment remained below 4 percent and that “the number of job openings remained relatively to the unemployed has increased. The number of employees is still above the pre-pandemic level.

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