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You’d think a strong labor market report would be good news. Read on to see why the opposite might hold true.
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Economists spent much of 2022 warning consumers of a 2023 recession. But at this point, it’s pretty safe to say that we’ll be steering clear of a broad economic downturn this year.
In fact, September’s jobs report tells us that the labor market and economy are quite strong. Last month, a surprising 336,000 new jobs were added to the economy. And the national unemployment rate held steady at 3.8%, which is a historically low number.
Of course, you’d think the addition of 336,000 new jobs would be a good thing. But here’s why the opposite might end up happening.
The problem with a strong labor market
The Federal Reserve has been raising interest rates in an effort to slow the pace of inflation. At its last meeting, the central bank hit pause on its rate hikes. But it still has two more meetings to go before the end of the year. And now, there’s reason to be concerned that the Fed might use September’s labor market data to justify an additional rate hike.
The Fed does not want to send the economy plummeting into a recession. It simply wants to control inflation. Too many rate hikes have the potential to do the former. But if the Fed sees strong growth in the labor market, it might take the opinion that the U.S. economy can withstand another rate hike. The result? Higher borrowing costs for consumers.
The Fed is not in charge of setting individual consumer borrowing rates. The rate you’re charged on an auto or personal loan, for example, is set by your lender — not the Fed.
Rather, the Fed controls the federal funds rate, which is what banks and financial institutions charge each other for short-term borrowing. When that benchmark interest rate rises, short-term borrowing becomes more expensive for banks and lenders, so they tend to pass that cost onto consumers.
As it is, consumer borrowing rates are elevated across a range of products, from home equity loans to mortgages. Another rate hike could therefore be financially devastating for consumers who need to borrow in the near term and can’t wait.
It’s okay to celebrate, but with caution
A strong labor market report should be a good thing in theory, and so it’s okay to be happy about the fact that the jobs situation is solid. But if you’re gearing up to apply for a loan, you may want to do so very quickly — before the Fed raises rates again and borrowing becomes more expensive.
Meanwhile, just because the labor market is strong right now doesn’t mean that things won’t deteriorate at some point. So if you’re currently short on emergency savings, do your best to boost your personal cash reserves while the economy is in good shape and you’re still gainfully employed.
Incidentally, higher interest rates make it a good time to be putting money into a high-yield savings account. So boosting your cash reserves might give you not just peace of mind, but extra income in the form of interest.
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