An unexpected job surge confounds the Fed's economic models

WASHINGTON (AP) — Does the Federal Reserve have it wrong?

For months, the Fed has been warily watching the U.S. economy's robust job gains out of concern that employers, desperate to hire, will keep boosting pay and, in turn, keep inflation elevated. But January’s blowout job growth coincided with an actual slowdown in wage growth. And it followed an easing of numerous inflation measures in recent months.

The past year's consistently robust hiring gains have also defied the fastest increase in the Fed's benchmark interest rate in four decades — an aggressive effort by the central bank to cool hiring, economic growth and the spiking prices that have bedeviled American households for nearly two years.

Instead, economists were astonished when the government reported Friday that employers added an explosive 517,000 jobs last month and that the unemployment rate sank to a new 53-year low of 3.4%.

“Today’s jobs report is almost too good to be true,” said Julia Pollak, chief economist at ZipRecruiter. “Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction.”

In economic models used by the Fed and most mainstream economists, a job market with strong hiring and a low unemployment rate typically fuels higher inflation. Under this scenario, companies feel compelled to keep boosting wages to attract and keep workers. They often then pass those higher labor costs on to their customers by raising prices. Their higher-paid workers also have more money to spend. Both trends can feed inflation pressures.

Yet even as hiring has been solid in the past six months, year-over-year inflation has fallen from a peak of 9.1% in June to 6.5% in December. Much of that decline reflects cheaper gas prices. But even...