The May jobs report was good but not great. The U.S. economy added 559,000 jobs over the month according to a survey of employers. But after April’s disappointing report (+278,000 jobs, after revisions), the improvement in May is proof that the labor market is recovering solidly from the Viral Recession.
The Federal Open Market Committee kept monetary policy unchanged in its June 16 statement. The federal funds rate is staying in a 0.00% to 0.25% range and the central bank is maintaining monthly purchases of $80 billion of long-term Treasurys and $40 billion of mortgage-backed securities, putting downward pressure on long-term interest rates.
Conditions for raising the fed funds rate were also unchanged from the previous statement on April 28: the FOMC does not expect to increase the fed funds rate until the job market is at full employment and inflation is set “to moderately exceed 2% for some time.”
The FOMC expects to maintain its securities purchases until the economy has made “substantial further progress” toward its employment and inflation goals. However, more than one-half of FOMC participants expect to increase the fed funds rate in 2023; in the previous “dot plot” from March, the median fed funds rate remained in its current near-zero range until at least 2024.
Inflation has picked up in the spring of 2021, but much of the acceleration will prove temporary. In year-over-year terms, consumer price index inflation accelerated to 5.0% in May from 4.2% in April, the fastest pace since August 2008, when surging energy prices caused an inflationary spike. The year-over-year comparison is deceptive, however, since consumer prices fell last April and May as the economy entered freefall. Relative to February 2020, consumer prices were up 3.1% in May 2021.
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