Whether Republicans succeed in passing their tax plan will matter for the economy. What the job market does, and how the Federal Reserve under the leadership of Jerome Powell responds to it, will matter more.
After a storm-related stumble, hiring picked up in October. The Labor Department on Friday reported the U.S. added 261,000 jobs last month, versus a gain of 18,000 in September, when the aftermaths of Hurricanes Harvey and Irma kept many people out of work. The unemployment slipped to a new multiyear low of 4.1%.
But although the labor market is strong, jobs growth is slowing. There were two million more jobs last month than a year earlier; in October 2016, the on-the-year gain was 2.4 million, and in October 2015, it was 2.8 million.
Some of that shift lower in hiring is a reflection of slow economic growth—companies aren’t going to hire to meet demand that isn’t there—so maybe if the recent pickup in gross domestic product continues, the job gains will reaccelerate. But it is also a reflection of a tighter labor market, where companies are struggling to fill jobs and are resisting paying higher wages to attract the workers they say they need. Average hourly earnings were up just 2.4% last month from a year earlier.
So what happens next? One possibility is that employers hold the line on wages, and hiring continues to drift lower until the job market is adding the 100,000 or so workers a month needed to keep up with population growth. The result would be uninspiring economic growth and low inflation—or pretty much what investors have been used to over the past several years. Under those circumstances, Fed governor Powell, if he gets confirmed for the chairmanship, probably would guide the Fed to raise rates slowly.
The risk might be what would happen to asset prices. Stocks and corporate bonds already look expensive and, they could get downright frothy, creating risks for the economy. Mr. Powell favors lighter financial regulation than current Fed Chairwoman Janet Yellen, but he was also worried about investors’ reach for yield during the run-up to the 2013 taper tantrum.
The other possibility is that employers start paying more. Maybe it happens because demand heats up, intensifying the need for workers, or maybe because the money they get from corporate tax breaks gives them more firepower to compete for workers. Or maybe it happens just because the job market has tightened to the point where it is hard to keep workers without paying them more.
Then the Fed would start worrying more about the economy overheating, launching it into a debate over how quickly to raise rates. Experience suggests it would be a dangerous time for the Fed and the economy.
If he gets the nod from the Senate, Mr. Powell will be at the Fed’s helm early next year. He could be put to the test soon after.
Write to Justin Lahart at firstname.lastname@example.org