The unemployment rate in the United States fell to its lowest level in 50 years. However, analysts say that this increase is likely to spur another round of intense interest rate hikes by the US Federal Reserve. 

According to the US Bureau of Labor Statistics, the country recorded 517,000 new jobs in January, more than twice what economists expected. The unemployment rate fell to 3.4%, its lowest level since 1969.

Speaking on Taking Stock with Kalilah Reynolds, CEO of Profit Jumpstarter, Keisha Bailey, said that the increase in jobs may hurt the Fed’s attempt to bring down inflation.

The Federal Reserve, which is the US’s Central Bank, has raised interest rates eight times since the start of the pandemic to cut spending and temper inflation.

Bailey explained that more people in the workforce leads to more spending and increased demands, which drives up the cost of food and services.

“The Fed wants wages to fall. Back in 2020, a lot of people came out of the workforce.  Because of that, employers had to raise wages to get people to want to work; so the prices of salaries went up, which created inflation,” she explained.

She said that the Central Bank reacted to this by raising interest rates, which increased the operating expenses of businesses with the intent to force them to cut salaries. 

“The Fed wanted employers to say operating is very expensive, we need to cut back your hours because we can’t afford to pay you that much any more,” Bailey said.

“The trickle down effect would be that employees will spend less, which would cause a fall in the demand for goods, and the prices for general goods and services would fall. This would cause inflation to go down,” she added.

However, the CEO noted that consumers had cash saved from the pandemic because they were not going out. This, coupled with the latest jobs report, may force the Fed to resume its aggressive interest rate hikes.

Impact on Jamaica

Bailey noted that if the Fed continues to raise interest rates, it is likely to have a spillover effect in Jamaica. 

“Because the BOJ (Bank of Jamaica) will have to defend the Jamaican dollar,” she said.

Since the pandemic started, the BOJ has raised interest rates by 650 basis points to 7%. Jamaica’s point-to-point inflation rate for December was 9.4%, down from a high of 11%, but still outside the BOJ’s target range of 4-6%.