By Allison Morrow, CNN Business
But the January report, released on Friday, is the one to pay attention to. The overall result – 467,000 jobs added last month – is much better than most economists had expected. The report also previously revised figures ho-hum for November and December, showing that the labor market has held up at a healthier pace than we previously thought.
That’s good news, but it could trigger a chain of events that will directly affect your wallet.
1. Debt will soon be harder to repay
If there were any doubts about the Federal Reserve’s confidence in raising interest rates, the January jobs report simply vanquished them.
“The Fed got a belated Christmas present,” said Johan Grahn, vice president and head of ETFs at AllianzIM. “It’s a free ride for them to raise rates…If the Fed was ever looking to do anything bold, now would be the time.”
The central bank has been reluctant to cut economic support too quickly, fearing the economy may be fragile. Even as inflation, fueled in part by the Fed’s easy money policies, hit nearly 40-year highs, the Fed kept its foot on the accelerator, betting that the risk of higher inflation high was more tolerable than the risk of falling back into recession.
But now, it’s hard to imagine a better time to start braking. The Fed has signaled it will likely raise interest rates in March, followed by several more hikes throughout the year, to help bring inflation down. Given the strength of the labor market and solid consumer spending, it is increasingly clear that the economy can handle it.
What this means for your wallet: Loans are getting more expensive, which is bad news if you’re trying to pay off credit cards, car loans, or variable-interest student debt. Even fixed-rate mortgages, after hitting historic lows, have risen in recent weeks in anticipation of higher interest rates. Of course, this also means that your savings rate will increase, but that will hardly look like a bargain.
2. Prices could stop soaring
Soaring prices and shortages have been a headache for just about everyone over the past year, but when the Fed raises rates, it effectively dampens consumer demand, which should keep prices down. to get carried away. (Yay!)
Prices have risen too quickly – inflation rose by 7% between December 2020 and December 2021, a nearly four-decade high. Raising rates will nip that in the bud.
It won’t happen overnight, however. The Fed is likely to raise interest rates in small increments, probably a quarter of a percentage point at a time, over several months. The impact of these increases will take months to trickle down to the economy.
3. Need a new job or a raise? It is time
What the January report tells us, among other things, is that the economy hasn’t even shrugged off the Omicron variant. Part of the reason the report surprised economists is that many had overestimated the impact the highly contagious variant would have on the job market.
“The economy has evolved since Covid. Most people have learned to live with it,” said JJ Kinahan, chief market strategist at TD Ameritrade.
At the same time, people continue to stop en masse. Last year, a record number of people quit their jobs, while American employers had more vacancies than ever before. In December, 4.3 million Americans quit smoking, down slightly from November’s record high of 4.5 million. For context: before the pandemic, that averaged about 3.2 million per month.
Most of these people are leaving for better jobs. Workers continue to exercise exceptionally high leverage. Job vacancies rose to 10.9 million in December from a high of 11.1 million in July.
4. Your 401(k) can take a hit
The market turmoil we have seen over the past month could continue, especially if the strength of the economy prompts the Fed to raise rates more aggressively. Higher interest rates make it harder for companies to borrow money and cut profits, something Wall Street hates.
This news is probably more troubling for wealthy households as they are more exposed to the stock market than others. Yet stocks represent a larger portion of the average American’s net worth than ever before. According to the Fed, the poorest 50% of US households held $260 billion in stocks and mutual funds, or 2.9% of their wealth. That’s up from $90 billion and 1.8% of their wealth a decade ago.
— Paul R. La Monica, Anneken Tappe and Matt Egan contributed to this report.
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