The strong January jobs report released Feb. 3 reinforced the Federal Reserve’s stance that it will keep interest rates higher for longer.
And Fed Chairman Jerome Powell reiterated that message Feb.7.
“We think we are going to need to do further rate increases,” he said in a question-and-answer session at the Economic Club of Washington. “The labor market is extraordinarily strong.” If it stays that way, “it may well be the case that we have to do more,” he said.
That would mean higher rates on your loans, such as credit-card and mortgage debt.
Non-farm payrolls soared 517,000 in January, and the unemployment rate dropped to a 53-year low of 3.4%. At its meeting last week, the Fed lifted the federal funds rate target by 25 basis points to a range of 4.5% to 4.75%. Powell said after the meeting that a couple more rate hikes are likely.
“The disinflationary process has begun, but it has a long way to go,” he said Feb. 7. “The process will probably be bumpy…. The employment report shows why it will be a process that takes a significant period of time.”
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Powell Sees ‘Restrictive’ Policy for ‘Some Time’
That’s why the Fed thinks it has to raise interest rates further. “And we think we’ll have to hold policy at a restrictive level for some time,” Powell said.
The Fed has an inflation target of 2%. Its favored inflation indicator, the personal consumption expenditures price index, jumped 5% in 2022, 4.4% excluding food and energy.
As for market expectations, interest-rate futures indicate most traders and investors anticipate the Fed will boost interest rates by 0.25 percentage point at its March 21-22 meeting and another 25 basis points at its May 2-3 meeting.
But even though Powell said last week that he doesn’t see the Fed cutting rates this year, a substantial number of interest-rate traders and investors still do.
Stocks and Bonds May Face Negative Shock
That means the stock and bond markets could be in for a rude awakening. The markets have soared so far this year on enthusiasm the Fed won’t hike rates much further and may even lower them in 2023.
Stocks initially slid after Powell’s remarks Feb. 7, but jumped higher later in the day. To be sure, bond prices fell.
Obviously the Fed’s actions going forward will depend on economic data. As long as the job market remains strong, the Fed is likely to keep raising rates. But if the job market weakens and inflation continues to drop, the Fed may finish its rate-hike campaign in May.
In any case, a pause is likely after the May meeting, so the central bank can assess the impact of its tightening so far.
