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Fed chair: Hot jobs report shows fighting inflation will take time [1]

['Rachel Siegel']

Date: 2023-02-07

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The economy will need more interest rate increases to keep inflation on a consistent, downward track, Federal Reserve Chair Jerome H. Powell said Tuesday, adding that the lengthy process is probably “not going to be smooth. It’s probably going to be bumpy.” Wp Get the full experience. Choose your plan ArrowRight Powell has stuck to that message for months. But his remarks took on new weight after government data released last week showed the labor market is still piping hot, complicating the Fed’s fight to lower prices and tame inflation that stems from rising wages and mismatches in the labor market. Employers added a whopping 517,000 jobs in January, shattering expectations and upending impressions that the labor market was cooling. In a shock to observers, the unemployment rate fell to 3.4 percent, a low not seen since May 1969.

“We didn’t expect it to be this strong, but it kind of shows you why we think that this will be a process that takes a significant period of time,” Powell said at an event hosted by the Economic Club of Washington, D.C. (He took questions from David Rubenstein, president of the Economic Club and co-founder of the Carlyle Group, a private equity firm where Powell was a partner from 1997 to 2005.)

Two days before that report came out, the central bank hiked interest rates for the eighth straight time, moving the Fed’s base policy rate to between 4.5 and 4.75 percent. With inflation easing, policymakers decided to move at a slower pace than nearly all of last year, opting for a quarter-point hike as they prepare to stop hiking rates. After last week’s rate hike announcement, Powell said policymakers were planning “a couple of more rate hikes” to get borrowing costs high enough to meaningfully slow the economy, somewhere past 5 percent.

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On Tuesday, Powell did not directly answer whether the Fed would have made a different decision if policymakers had convened after the release of the January jobs report. He said that if economic data “continued” to come in stronger than expected, “we would certainly raise rates more” than officials anticipate now.

But Powell said the Fed digests the data as it arrives, without putting a value judgment on it: “We don’t have the luxury of thinking about ‘good’ or ‘bad.’ It just is what it is,” he said.

“Our job is to get inflation down to 2 percent and preserve maximum employment,” Powell said.

The markets flashed green during Powell’s remarks, shed their gains shortly after and then recovered again before the close. The Dow Jones industrial average ended the day up 265 points, or 0.78 percent. The S&P 500 climbed 1.29 percent, and the Nasdaq 1.9 percent.

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In the run-up to meetings in March, May and beyond, some Fed watchers speculate that more hikes could be needed, or that rates will have to stay higher for longer, if the labor market appears to be working against the Fed’s inflation fight.

“We read the February [Fed] meeting as confirming that the peak rate is data dependent, and while the committee had not yet seen enough to consider pausing after another hike in March, it recognized progress on disinflation,” Krishna Guha, vice chairman of Evercore ISI, wrote in a Tuesday morning analyst note. “The January employment report unfortunately goes in the opposite direction, suggesting the economy may be more resilient to rate hikes … and reinforcing the case for hiking beyond March.”

On Tuesday, Minneapolis Fed President Neel Kashkari told Bloomberg News that the strong jobs report underscored the reality that the Fed’s job is not finished. He said he is sticking to his assessment that rates need to climb to around 5.4 percent.

“I, too, was surprised by the big jobs number,” Kashkari said. “It tells me that so far we’re not seeing much of an imprint of our tightening to date on the labor market. … I haven’t seen anything yet to lower my rate path.”

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Some economists and Biden administration officials hailed the jobs data Friday as a hopeful sign that the economy can avoid a recession and that inflation can continue to fall while the labor market grows. In his State of the Union speech on Tuesday night, President Biden will likely speak on the state of the economy without weighing in on interest rate policy. The Fed closely guards its independence from politics, and while Powell has regularly scheduled meetings with the treasury secretary and other officials in the administration, Powell said he hasn’t “gotten any calls from President Biden,” a norm that President Donald Trump publicly disregarded.

There’s reason to be encouraged. So far, layoffs have largely been limited to sectors such as tech, finance, housing and media. And while consumer spending is pulling back, particularly on purchases of goods, it is still strong enough to cement expectations for modest economic growth this year. On Monday, Goldman Sachs cut the probability that the U.S. economy will enter a recession in the next 12 months to 25 percent, down from 35 percent.

But there is also a second, worrisome scenario: that the Fed can’t vanquish inflation unless pain comes for the labor market. Inflation has fallen for the past six months, from a June peak of 9.1 percent compared with the year before to 6.5 percent in December. But that is largely due to improved supply chains, falling gas and energy prices, a cooling housing market, and easing prices for consumer goods. And even the current inflation rate is higher than most American consumers have experienced for years.

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The bigger concern is that it will be harder to tame the remaining sources of inflation that stem from wage pressures and mismatches in the labor market, especially in service industries. In fact, while January’s job gains spanned many industries, the largest increases were in service fields such as leisure and hospitality, professional and business services, and health care.

“It is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market,” Powell said last week. “But I would also say that disinflationary process that you now see underway is really at an early stage.”

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[1] Url: https://www.washingtonpost.com/business/2023/02/07/powell-economy-jobs/

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