Jobs Report Keeps Federal Reserve on Track for 0.5-Point Rate Rise

The employment report showed continued strong hiring and brisk wage growth, which is a source of concern to Fed officials because they are trying to slow both trends to prevent higher prices and wages from growing embedded across the economy.

Employers added 263,000 jobs in November and the unemployment rate held steady at 3.7%. But revised wage data released Friday could concern Fed officials because it points to an acceleration in pay gains in recent months.

For the three months through November, average hourly earnings rose at a 5.8% annualized rate, the Labor Department said Friday. That is up from an initially reported 3.9% annualized rate for the three months ended October.

At the same time, senior Fed officials have clearly signaled their expectation that they can cool the pace of rate rises at their Dec. 13-14 meeting, ending an unprecedented string of 0.75-point rate rises at their past four meetings.

The Fed raised its benchmark federal-funds rate last month to a range between 3.75% and 4%, and officials have signaled they are on track to continue raising it to at least around 5% by next spring.

The Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, rose 6% in October from a year ago. Excluding volatile food and energy categories, the so-called core PCE index rose 5%. Economists often look at core inflation as a better gauge of underlying price pressures. The Fed targets 2% inflation over time.

Current pay gains are around 1.5 to 2 percentage points above what would be consistent with the Fed’s 2% target, Fed Chair

Jerome Powell

said during a moderated discussion on Wednesday. 

“We want wages to go up. We want wages to go up strongly,” he said. “But they’ve got to go up at a level that is consistent with 2% inflation over time.”

Mr. Powell said it was possible prices that rose sharply over the last two years, including housing costs and goods such as used cars, could decline in the coming year. But he signaled concern that inflation might ease to levels that are still too high. “Despite some promising developments, we have a long way to go” in bringing down inflation.

Mr. Powell and several of his colleagues have said they don’t believe wage growth played the primary role in driving up prices. But they are concerned that strong demand for labor and high inflation could create conditions that lead paychecks and prices to move higher in lockstep, which economists sometimes call a wage-price spiral.

“When you get to that point, you’re in serious trouble,” Mr. Powell said Wednesday. “We don’t think we’re at that point. But it can’t be that we can go on for five years at very high levels of inflation and that doesn’t work its way into the wage- and price-setting process pretty quickly.”

Fed officials have signaled they are entering a new phase of raising interest rates after having lifted them at the fastest pace since the early 1980s. Now, they are trying to determine more carefully how high rates will need to go and for how long to lower inflation.

Mr. Powell outlined two possible strategies. One would be to quickly raise interest rates well above the 4.5% to 5% level that many officials thought in September would be appropriate. Another would be to “go slower and feel your way a little bit to what we think is the right level” and “to hold on longer at a high level and not loosen policy too early.”

Mr. Powell indicated he and his colleagues were more comfortable with the second strategy because they don’t want to cause unnecessary damage to the economy. “We do not want to over tighten because cutting rates is not something we want to do soon,” he said. “So that’s why we’re slowing down and going to find our way to what the right level is.”

Write to Nick Timiraos at Nick.Timiraos@wsj.com