Labor market nearing pre-pandemic conditions, Fed report says

The Federal Reserve said Friday in a report to Congress that the U.S. labor market is back in the "tight but not overheated" situation it was in before the COVID pandemic threw the economy into disarray.

The report noted that the job market "continued to rebalance over the first half of this year," and added: "Labor demand has eased, as many job openings have declined in many sectors of the economy, and labor supply has continued to increase, supported by a strong pace of immigration."

"The balance between labor demand and supply appears similar to that in the period immediately before the pandemic, when the labor market was relatively tight but not overheated. Nominal wage growth continued to slow," the Fed's report said.

The semi-annual report comes ahead of two days of testimony by Fed Chair Jerome Powell, who is set to testify before Congress on Tuesday and Wednesday. Lawmakers are expected to press Powell on how the Fed will handle monetary policy heading into the election, with inflation showing signs of gradually easing and the labor market trending toward pre-pandemic levels of demand.

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Job growth has slowed in recent months and the unemployment rate has risen steadily from 3.5% last July to 4.1% as of June – up slightly from 4% a month ago and a level the Fed's report indicated was "still at a historically low level." 

The most recent jobs report, released Friday, also revised the April and May jobs reports downward by a combined 111,000 jobs as the unemployment rate edged up. 

Inflation remains around 2.6% based on the Fed's preferred Personal Consumption Expenditures Price index, which policymakers view as "elevated" though it's nearing a point where that may no longer be the case. 

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The consumer price index (CPI) was 3.3% year-over-year in May – a level that's down from the peak of 9.1% in June 2022 but remains above the Fed's target rate of 2%.

The central bank is set to get a fresh look at inflation data on Thursday when the Bureau of Labor Statistics releases the latest CPI report.

Policymakers are mulling potential interest rate cuts as early as September if economic data continues to show that inflation is easing – though Powell and members of the Federal Open Market Committee that controls monetary policy have said the decision to cut interest rates will be based on the data and not political considerations ahead of the November elections.

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The report to Congress also included an essay on "Monetary Policy Independence, Transparency, and Accountability" that reiterated the central bank's "operational independence" to make interest rate decisions based on long-term economic considerations instead of short-term political influence.

"It is widely understood that the monetary policy actions that deliver maximum employment and price stability in the longer run may involve restraining measures that entail short-run economic costs, while actions that raise output and employment to unsustainable levels have no long-run real benefits and may lead to elevated inflation rates," the Fed wrote.

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The Fed left interest rates unchanged at its most recent policy meeting, at a range of 5.25% to 5.50%, which is the highest range for the benchmark federal funds rate since 2001. 

Policymakers projected just one interest rate cut this year in the forecast released following the meeting.

Reuters contributed to this report.