The blockbuster jobs report supports the Fed's patience as it awaits a rate cut
Federal Reserve officials left interest rates unchanged this week and indicated their next step will likely be a cut — but they also suggested they are in no rush to make that change. Friday's jobs figures are likely to reinforce their cautious stance.
Employers hired much faster than expected in January, and average hourly wages rose 4.5 percent over the year, the fastest pace since September and a turnaround after months of slowdown.
Federal Reserve Chairman Jerome H. Powell made clear at his news conference Wednesday that the central bank has no intention of keeping rates high just to slow the labor market, but the report suggested the economy may not be cooling off completely. as much as policymakers expected.
Given this continued strength, it is unlikely that the Fed will feel pressure to cut rates at its next meeting March 19-20. Policymakers don't want to keep borrowing costs too high for too long and risk a painful recession, but the data suggests that a possible downturn is still very far away. Instead of faltering, the job market is booming.
The central bank's policy rate is now set at 5.25 to 5.5 percent, a level high enough that economists say it will cool the economy as it trickles through financial markets and weighs on mortgage, credit card and business loans.
The Fed's goal in cooling the economy is to curb inflation, and price increases have been easing: Over the past six months, inflation data has been near normal.
But that happened without much broader economic slowdown. Job openings have fallen and the housing market has slowed in response to higher interest rates, but both employment and consumer spending have remained surprisingly resilient.
Mr Powell suggested this week that the Fed would like to see more evidence that inflation is coming under control before it starts cutting rates and that it is unlikely to have enough data to be confident about that before its March meeting .
Markets sharply reduced the chances of a rate cut at that meeting, following January's jobs data.
In particular, Mr. Powell said the Fed was prepared to be patient — rather than wary and reactive — as it waits for wage growth to slow to normal levels. Some economists think the relatively rapid pace of wage increases could prevent inflation from stabilizing at 2 percent over time, if it were to persist.
“I think the labor market is at or near normal by many measures, but not completely back to normal,” Mr. Powell said. “Vacancies are not quite back to where they were,” and wage increases “are not quite back to where they were.”
He added that wage increases will “probably take a few years to come back all the way, and that's OK.”
January's strong payroll figure came in part because employees were working fewer hours – meaning hourly earnings were measured on a smaller base, potentially inflating them. Given that the big monthly pop should be taken “with a large grain of salt,” wrote Omair Sharif, founder of Inflation Insights.
But other signs of strength in the report were fairly broad-based.
Given Mr. Powell's comments — and how much inflation has fallen in recent months — Kathy Bostjancic, chief economist at Nationwide, said the Fed could still continue cutting rates this year even with a very strong labor market. She expects a decline in May or June.
“It looks like inflation is the main driver,” Ms. Bostjancic said, addressing the strength of the new jobs numbers. “This should have a very modest impact on the timing – and even the extent – of rate cuts.”