Brisk Wage Gains in December Could Keep the Fed Watchful

Friday’s jobs data suggested that wages are still climbing briskly as hiring remains strong — facts that could keep the Federal Reserve wary as it contemplates its next move on interest rates.

Fed officials raised interest rates from near zero to a range of 5.25 to 5.5 percent between March 2022 and last July, but they have kept borrowing costs steady for months as progress toward slower inflation has finally materialized.

Central bankers have yet to rule out another rate increase, but most economists think that their next move will be to cut borrowing costs. Fed officials themselves have forecast three quarter-point reductions this year, but they have offered few hints about when those cuts might start. Investors have been betting that cuts could begin as soon as March.

While the Fed is likely to weigh the December jobs report when considering what comes next with policy, it is unlikely to be a pivotal factor. There will be two more employment reports before the central bank’s March 20 meeting, for example.

But the latest evidence on the labor market could give officials a fresh reason to be cautious before declaring victory. Friday’s jobs report suggested that the economy retained a surprising amount of momentum at the end of 2023. In particular, average hourly earnings climbed 0.4 percent from the previous month, and 4.1 percent compared to a year earlier. That was faster than the 3.9 percent expectation in a Bloomberg survey of economists.

Jerome H. Powell, the Fed chair, suggested last month that wage gains at their recent pace — up about 4 percent from a year earlier — were probably still slightly hotter than what is consistent with slow and steady inflation. If employers are paying workers more, they may try to raise prices to cover those higher labor costs, keeping inflation chugging.

But Mr. Powell noted that wage gains had “been gradually cooling off.” The fresh uptick is just one data point, but if it persists, it could call that trend into question.

Fed officials had also been taking heart in a recent slowdown in job gains, one that Friday’s report cut against. Employers added 216,000 jobs in December, more than economists had predicted, and the unemployment rate remained low.

Even so, other signs have continued to suggest that the job market is cooling somewhat: Job openings have been coming down, and employers themselves often report less stress when it comes to recruiting.

At the Fed’s last meeting, “participants assessed that while the labor market remained tight, it continued to come into better balance,” according to minutes released this week. “Many noted that nominal wage growth had continued to slow broadly and that business contacts expected a further reduction in wage growth.”

While the Fed aims for maximum employment — and usually celebrates strong jobs data — it is currently balancing that goal against its efforts to cool rapid inflation.