Tag: Unemployment

Blowout U.S. Jobs Report Keeps Fed on Hawkish Path, For Now

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market showed no signs of cooling in March, with employers adding a whopping 303,000 new jobs last month while the unemployment rate fell to 3.8%. The much stronger-than-expected employment gains provide further evidence of the economy’s resilience even in the face of the Federal Reserve’s aggressive interest rate hikes over the past year.

The blockbuster jobs number reported by the Bureau of Labor Statistics on Friday handily exceeded economists’ consensus estimate of 214,000. It marked a sizeable acceleration from February’s solid 207,000 job additions and landed squarely above the 203,000 average over the past year.

Details within the report were equally impressive. The labor force participation rate ticked up to 62.7% as more Americans entered the workforce, while average hourly earnings rose a healthy 0.3% over the previous month. On an annualized basis, wage growth cooled slightly to 4.1% but remains elevated compared to pre-pandemic norms.

Investors closely watch employment costs for signs that stubbornly high inflation may be becoming entrenched. If wage pressures remain too hot, it could force the Fed to keep interest rates restrictive for longer as inflation proves difficult to tame.

“The March employment report definitively shows inflation remains a threat, and the Fed’s work is not done yet,” said EconomicGrizzly chief economist Jeremy Hill. “Cooler wage gains are a step in the right direction, but the central bank remains well behind the curve when it comes to getting inflation under control.”

From a markets perspective, the report prompted traders to dial back expectations for an imminent Fed rate cut. Prior to the data, traders were pricing in around a 60% chance of the first rate reduction coming as soon as June. However, those odds fell to 55% following the jobs numbers, signaling many now see cuts being pushed back to late 2024.

Fed chair Jerome Powell sounded relatively hawkish in comments earlier this week, referring to the labor market as “strong but rebalancing” and indicating more progress is needed on inflation before contemplating rate cuts. While the central bank welcomes a gradual softening of labor conditions, an outright collapse is viewed as unnecessarily painful for the economy.

If job gains stay heated but wage growth continues moderating, the Fed may feel emboldened to start cutting rates in the second half of 2024. A resilient labor market accompanied by cooler inflation pressures is the so-called “soft landing” scenario policymakers are aiming for as they attempt to tame inflation without tipping the economy into recession.

Sector details showed broad-based strength in March’s employment figures. Healthcare led the way by adding 72,000 positions, followed by 71,000 new government jobs. The construction industry saw an encouraging 39,000 hires, double its average monthly pace over the past year. Leisure & hospitality and retail also posted healthy employment increases.

The labor market’s persistent strength comes even as overall economic growth appears to be downshifting. GDP rose just 0.9% on an annualized basis in the final quarter of 2023 after expanding 2.6% in Q3, indicating deceleration amid the Fed’s rate hiking campaign.

While consumers have remained largely resilient thanks to a robust labor market, business investment has taken a hit from higher borrowing costs. This divergence could ultimately lead to payroll reductions in corporate America should profits come under further pressure.

For now, however, the U.S. labor force is flexing its muscles even as economic storm clouds gather. How long employment can defy the Fed’s rate hikes remains to be seen, but March’s outsized jobs report should keep policymakers on a hawkish path over the next few months.

Red Hot Labor Market as U.S. Employers Add 184,000 Jobs in March

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market showed no signs of cooling in March, with private employers boosting payrolls by 184,000 last month according to a report by payrolls processor ADP. The stronger-than-expected gain signaled the jobs machine kept humming despite the Federal Reserve’s aggressive interest rate hikes aimed at slowing the economy and conquering inflation.

The 184,000 increase was the largest monthly jobs number since July 2023 and topped economists’ estimates of 148,000. It followed an upwardly revised 155,000 gain in February. The vibrant report sets the stage for the government’s highly anticipated nonfarm payrolls release on Friday, with economists forecasting a still-solid 200,000 jobs were added economy-wide last month.

“March was surprising not just for the pay gains, but the sectors that recorded them,” said Nela Richardson, chief economist at ADP. “Inflation has been cooling, but our data shows pay is heating up in both goods and services.”

Indeed, wage pressures showed little evidence of easing last month. The ADP data showed annual pay increases for those keeping their jobs accelerated to 5.1%, matching the elevated pace from February. Workers switching jobs saw an even bigger 10% year-over-year jump in wages.

The stubborn strength of the labor market and still-elevated pace of wage increases complicates the Federal Reserve’s efforts to tame inflation, which has started to moderate but remains well above the central bank’s 2% target. Fed officials have signaled they likely have more interest rate hikes ahead as they try to dampen hiring and pay growth enough to fully wrestle inflation under control.

“The labor market remains surprisingly resilient despite the Fed’s tightening of financial conditions over the past year,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The strong March ADP gain suggests we’re not out of the woods yet on inflation pressures.”

Job growth in March was fairly broad-based across sectors and company sizes. The leisure and hospitality sector continued to be a standout, adding 63,000 new positions as Americans kept splurging on travel and entertainment. Construction payrolls increased by 33,000, while the trade, transportation and utilities sectors combined to add 29,000 workers.

Hiring was also widespread geographically, with the South leading the way by adding 91,000 new employees. The data showed bigger companies with over 50 workers accounted for most of the overall job gains.

One blemish was the professional and business services sector, which cut payrolls by 8,000 in a potential sign of some pockets of weakness emerging amid higher borrowing costs.

While the ADP report doesn’t always sync perfectly with the government’s more comprehensive employment survey, it adds to recent signs that a long-predicted U.S. economic downturn from the Fed’s inflation-fighting campaign has yet to fully materialize. The labor market has remained extraordinarily buoyant, with job openings still far exceeding the number of unemployed and layoffs staying low.

Economists expect Friday’s jobs report to show the unemployment rate held steady at 3.9% in March. If confirmed, it would mark over a year since joblessness was last below 4%, an extremely tight labor market that has forced many companies to raise wages at an unusually rapid clip in order to attract and retain workers.

With paychecks still climbing at a relatively elevated pace, the Fed worries inflationary pressures could become entrenched in the form of a self-perpetuating wage-price spiral. That fear raises the risk the central bank could opt for even higher interest rates, potentially increasing recession risks.

Job Growth Exceeds Expectations, but Raises Questions on Economy’s Path

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market turned in another solid performance in February, adding 275,000 new jobs and keeping the unemployment rate near historic lows. However, mixed signals within the employment report raised more questions than answers about the strength of the economy and the Federal Reserve’s next policy moves.

The 275,000 increase in non-farm payrolls topped economists’ expectations of 198,000 and showed hiring picked up after January’s downwardly revised 229,000 gain. The unemployment rate ticked higher to 3.9%, as more Americans entered the labor force but couldn’t immediately find jobs.

While the headline job growth was robust, details within the report revealed some potential red flags. Revisions slashed 167,000 jobs off the initially reported totals for December and January, indicating the labor market wasn’t quite as sturdy late last year as originally thought.

Additionally, wage growth is moderating after a strong run in 2022. Average hourly earnings rose just 0.1% for the month, undershooting forecasts, and are up 4.3% over the past year versus 4.5% year-over-year in January. Slower wage growth could ease inflation pressures but also signals softer labor demand.

“This jobs report has something for everyone in terms of economic narratives,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “You can view it as evidence the economy is weakening and a recession could be coming, or that it’s a Goldilocks scenario with solid growth and contained inflation.”

The details were undeniably mixed. Full-time jobs decreased, while part-time positions increased. And while the unemployment rate rose, measures of labor force participation also ticked higher, indicating workers are returning from the sidelines.

Industry hiring patterns reinforced the muddy economic picture. Healthcare companies led with 67,000 new jobs last month, while the government added 52,000 positions. Those stable healthcare and public sector gains were offset by disappointments in interest-rate sensitive areas like construction (23,000) and manufacturing, which saw a decline.

The spending side of the economy showed signs of life, with restaurants/bars adding 42,000 jobs and retailers hiring 19,000. But some of those consumer-facing gains could simply reflect volatility after January’s weather disruptions.

From an investing standpoint, the conflicting data raises uncertainty around the Fed’s rate path and the probability of a recession arriving in the next 12-18 months. Prior to the release, markets had priced in the Fed’s first rate cut in March based on signs of economic slowing.

However, the February jobs figures, combined with recent hawkish Fed rhetoric, shifted rate cut expectations to June or even July. Traders now see around 4 quarter-point cuts this year, down from upwards of 6-7 cuts priced in previously.

Dan North, senior economist at Allianz Trade Americas, said the nuanced report likely “doesn’t change the narrative” for the Fed in the near-term. “We’re still growing jobs at a good pace, and wages, while elevated, have come down a bit,” he said. “The Fed has more wood to chop, but the path towards easier policy is still visible on the horizon.”

For equity investors, the employment crosscurrents create a murky outlook that will require close monitoring of upcoming data points. On one hand, continued job creation supports consumer spending and Corporate America’s ability to preserve profit margins through the year.

The risk is that the Fed overtightens policy, doesn’t cut rates quickly enough, and the still-resilient labor market tips into contraction. That could increase recession odds and put downward pressure on revenue and earnings forecasts.

When job reports deliver contradictory signals, the prudent investment strategy is to prepare for multiple scenarios. Building defensive portfolio positions and rebalancing asset allocations can provide insulation if economic conditions deteriorate faster than expected. At the same time, holding core positions in quality companies can allow for participation if solid labor markets translate into better-than-feared growth.

Mixed economic data opens the door to increased market volatility. And in that environment, disciplined investing, active management, and opportunistic portfolio adjustments often become critical drivers of long-term returns.

January Jobs Report Beats Estimates

Posted on by cpatches

The latest jobs report for January 2024 has exceeded expectations, showcasing the robustness of the U.S. economy despite recent high-profile layoffs. The key indicators demonstrate strong job creation, surpassing both estimates and revised figures from the previous month.

Key Figures

In January 2024, the U.S. economy generated an impressive 353,000 nonfarm payroll jobs, well above the Dow Jones estimates of 185,000. This figure also outpaced the revised December 2023 data, which reported 333,000 jobs created. The unemployment rate for January 2024 remained steady at 3.7%, surpassing the estimated 3.8%, indicating a stable job market. Average hourly earnings exhibited substantial growth, surging by 0.6%, doubling the estimates. Year-over-year, wages have increased by 4.5%, exceeding the forecasted 4.1%. Significant contributors to January’s job growth include Professional and Business Services (74,000 jobs), Health Care (70,000), Retail Trade (45,000), Government (36,000), Social Assistance (30,000), and Manufacturing (23,000). Despite the overall positive report, there were slight declines. The labor force participation rate dipped to 62.5%, down 0.1% from December 2023, and average weekly hours worked decreased slightly to 34.1.

Resilience Amidst Recent High-Profile Layoffs

This comes in the midst of many high-profile layoffs. UPS announced 12,000 job cuts amidst lower package volume. iRobot announced 350 layoffs following a failed acquisition by Amazon. Levi Strauss announced they will layoff between 10 and 15% of their workers. Microsoft, following their major Activision Blizzard acquisition, announced 1900 layoffs in their gaming division. Citi Group announced that they will lay off 20,000 employees over the next two years. But, as of this most recent report, it appears these layoffs have not significantly impacted the overall employment landscape.

The Federal Reserve’s Perspective

The strong job numbers prompt speculation about potential Federal Reserve actions. Fed Chair Jerome Powell emphasized the current strength of the labor market, stating that the Fed is looking for a balance and robust growth. Powell noted that the Fed doesn’t require a significant softening in the labor market to consider rate cuts but is keen on seeing continued strong growth and decreasing inflation.

The Federal Reserve, in its recent meeting, maintained benchmark short-term borrowing costs and hinted at potential rate cuts in the future. However, such cuts are contingent on further signs of cooling inflation. The central bank remains focused on addressing the impact of high inflation on consumers rather than adhering to a specific growth mandate.

January’s jobs report underscores the resilience of the U.S. economy, outperforming expectations in key indicators. While high-profile layoffs have made headlines, the overall labor market remains robust. The Federal Reserve’s cautious optimism and potential future rate adjustments indicate a nuanced approach to maintaining economic balance.

Jobless Claims Hit Lowest Level Since September 2022 as Labor Market Defies Fed

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. job market continues to show resilience despite the Federal Reserve’s efforts to cool economic growth, according to new data released Thursday. Initial jobless claims for the week ending January 13 fell to 187,000, the lowest level since September of last year.

The decline in claims offers the latest evidence that employers remain reluctant to lay off workers even as the Fed raises interest rates to curb demand. The total marked a 16,000 drop from the previous week and came in well below economist forecasts of 208,000.

“Employers may be adding fewer workers monthly, but they are holding onto the ones they have and paying higher wages given the competitive labor market,” said Robert Frick, corporate economist at Navy Federal Credit Union.

The surprising strength comes even as the Fed has lifted its benchmark interest rate seven times in 2023 from near zero to a range of 4.25% to 4.50%. The goal is to dampen demand across the economy, particularly the red-hot job market, in order to bring down uncomfortably high inflation.

In addition to the drop in claims, continuing jobless claims for the week ending January 6 also declined by 26,000 to 1.806 million. That figure runs a week behind the headline number and likewise came in below economist estimates.

The resilience in the labor market comes even as broader economic activity shows signs of cooling. In its latest Beige Book report, the Fed noted that the economy has seen “little or no change” since late November.

Housing markets are a key area feeling the pinch from higher borrowing costs. The Fed summary showed residential real estate activity constrained by rising mortgage rates. Still, there were some green shoots in Thursday’s housing starts data.

Building permits, a leading indicator of future home construction, rose 1.9% in December to 1.495 million. That exceeded economist forecasts of 1.48 million permits. Actual housing starts declined 4.3% to 1.46 million, but still topped estimates calling for 1.43 million.

“The prospects of future easing from the Fed were raising hopes that the pace could accelerate,” the original article noted about housing.

Outside of housing, manufacturing activity in the Philadelphia region contracted again in January, though at a slightly slower pace. The Philly Fed’s index rose to -10.6 this month from -12.8 in December. Readings below zero indicate shrinking activity.

The survey’s gauge of employment at factories in the region also remained negative, though it improved to -1.8 from -7.4 in December. Overall, the Philly Fed report showed declining orders, longer delivery times, and falling inventories.

On inflation, the prices paid index within the survey fell to 43.4 from 51.8 last month. That indicates some easing of cost pressures for manufacturers in the region. The prices received or charged index also ticked lower.

The inflation figures align with the Fed’s latest nationwide look at the economy. The central bank’s Beige Book noted signs of slowing wage growth and easing price pressures. That could give the Fed cover to dial back the pace of interest rate hikes at upcoming meetings this year.

But policymakers also reiterated they plan to keep rates elevated for some time to ensure inflation continues cooling toward the 2% target. Markets still expect the Fed to lift rates again at both its February and March gatherings, albeit by smaller increments of 25 basis points.

With inflation showing increasing signs of moderating from four-decade highs, the focus turns to how much the Fed’s actions will slow economic growth. Thursday’s report on jobless claims hints the labor market remains on solid ground for now.

Employers added over 200,000 jobs per month on average in 2023, well above the pace needed to keep up with population growth. And the unemployment rate ended the year at 3.5%, matching a 50-year low first hit in September.

While job gains are expected to downshift in 2024, the claims report suggests employers are not rushing to cut staff yet. How long the resilience lasts as interest rates remain elevated and growth slows remains to be seen.

For the Fed, it will be a delicate balance between cooling the economy just enough to rein in inflation, without causing substantial job losses or triggering a recession. How well they thread that needle will be closely watched in 2024.

Slower Job Growth in October Adds to Evidence of Cooling Labor Market

Posted on by slightbourne@noblecapitalmarkets.com

The October employment report showed a moderation in U.S. job growth, adding to signs that the blazing labor market may be starting to ease. Nonfarm payrolls increased by 150,000 last month, lower than consensus estimates of 180,000 and a slowdown from September’s revised gain of 289,000 jobs.

The unemployment rate ticked up to 3.9% from 3.8% in September, hitting the highest level since January 2022. Wages also rose less than expected, with average hourly earnings climbing just 0.2% month-over-month and 4.1% year-over-year.

October’s report points to a cooling job market after over a year of robust gains that outpaced labor force growth. The slowdown was largely driven by a decline of 35,000 manufacturing jobs stemming from strike activity at major automakers including GM, Ford, and Chrysler.

The United Auto Workers unions reached tentative agreements with the automakers this week, so some job gains are expected to be recouped in November. But broader moderation in hiring aligns with other indicators of slowing momentum. Job openings declined significantly in September, quits rate dipped, and small business hiring plans softened.

For investors, the cooling labor market supports the case for a less aggressive Fed as the central bank aims to tame inflation without triggering a recession. Markets are now pricing in a 90% chance of no rate hike at the December FOMC meeting, compared to an 80% chance prior to the jobs report.

The Chance of a Soft Landing Improves

The decline in wage growth in particular eases some of the Fed’s inflation worries. Slowing wage pressures reduces the risk of a 1970s-style wage-price spiral. This gives the Fed room to pause rate hikes to assess the delayed impact of prior tightening.

Markets cheered the higher likelihood of no December hike, with stocks surging on Friday. The S&P 500 gained 1.4% in morning trading while the tech-heavy Nasdaq jumped 1.7%. Treasury yields declined, with the 10-year falling to 4.09% from 4.15% on Thursday.

Investors have become increasingly optimistic in recent weeks that the Fed can orchestrate a soft landing, avoiding recession while bringing inflation back toward its 2% target. CPI inflation showed signs of moderating in October, declining more than expected to 7.7%.

But risks remain, especially with services inflation still running hot. The Fed’s terminal rate will likely still need to move higher than current levels around 4.5%. Any renewed acceleration in wage growth could also put a December hike back on the table.

Labor Market Resilience Still Evident

While job gains moderated, some details within October’s report demonstrate continued labor market resilience. The unemployment rate remains near 50-year lows at 3.9%, still below pre-pandemic levels. Labor force participation also remains above pre-COVID levels despite a slight tick down in October.

The household survey showed a gain of 328,000 employed persons last month, providing a counterweight to the slower payrolls figure based on the establishment survey.

Job openings still exceeded available workers by over 4 million in September. And weekly jobless claims remain around historically low levels, totaling 217,000 for the week ended October 29.

With demand for workers still outstripping supply, risks of a sharp pullback in hiring seem limited. But the October report supports the case for a period of slower job gains as supply and demand rebalances.

Moderating job growth gives the Fed important breathing room as it assesses progress toward its 2% inflation goal. For investors, it improves the odds that the Fed can achieve a soft landing, avoiding aggressive hikes even as inflation persists at elevated levels.

Jobs Report Rockets Past Wall Street Estimates

Posted on by slightbourne@noblecapitalmarkets.com

The September jobs report revealed the U.S. economy added 336,000 jobs last month, nearly double expectations. The data highlights the resilience of the labor market even as the Federal Reserve aggressively raises interest rates to cool demand.

Economists surveyed by Bloomberg had forecast 170,000 job additions for September. The actual gain of 336,000 jobs suggests the labor market remains strong despite broader economic headwinds.

The unemployment rate held steady at 3.8%, unchanged from August and still near historic lows. This shows employers continue hiring even amid rising recession concerns.

Wage growth moderated but still increased 0.3% month-over-month and 5.0% year-over-year. Slowing wage gains may reflect reduced leverage for workers as economic uncertainty increases.

The report reinforces the tight labor market conditions the Fed has been hoping to loosen with its restrictive policy. Rate hikes aim to reduce open jobs and slow wage growth to contain inflationary pressures.

Yet jobs growth keeps exceeding forecasts, defying expectations of a downshift. The Fed wants to see clear cooling before it eases up on rate hikes. This report suggests its work is far from done.

The September strength was broad-based across industries. Leisure and hospitality added 96,000 jobs, largely from bars and restaurants staffing back up. Government employment rose 73,000 while healthcare added 41,000 jobs.

Source: U.S. Bureau of Labor Statistics via CNBC

Upward revisions to July and August payrolls also paint a robust picture. An additional 119,000 jobs were created in those months combined versus initial estimates.

Markets are now pricing in a reduced chance of another major Fed rate hike in November following the jobs data. However, resilient labor demand will keep pressure on the central bank to maintain its aggressive tightening campaign.

While the Fed has raised rates five times this year, the benchmark rate likely needs to go higher to materially impact hiring and wage trajectories. The latest jobs figures support this view.

Ongoing job market tightness suggests inflation could become entrenched at elevated levels without further policy action. Businesses continue competing for limited workers, fueling wage and price increases.

The strength also hints at economic momentum still left despite bearish recession calls. Job security remains solid for many Americans even as growth slows.

Of course, the labor market is not immune to broader strains. If consumer and business activity keep moderating, job cuts could still materialize faster than expected.

For now, the September report shows employers shaking off gloomier outlooks and still urgently working to add staff and retain workers. This resiliency poses a dilemma for the Fed as it charts the course of rate hikes ahead.

The unexpectedly strong September jobs data highlights the difficult balancing act the Fed faces curbing inflation without sparking undue economic damage. For policymakers, the report likely solidifies additional rate hikes are still needed for a soft landing.

Jobless Claims Drop to Lowest Since February as Labor Market Holds Up

Posted on by slightbourne@noblecapitalmarkets.com

New applications for U.S. unemployment benefits fell unexpectedly last week to the lowest level since mid-February, signaling the job market remains tight even as broader economic headwinds build.

Initial jobless claims declined by 13,000 to 216,000 in the week ended September 2, the Labor Department reported Thursday. That was below economist forecasts for a rise to 234,000 and marked the fourth straight week of declines.

Continuing claims, which track ongoing unemployment, also dropped to 1.679 million for the week ended August 26. That was the lowest point since mid-July.

The downward trend in both initial and continuing claims points to ongoing resilience in the labor market amid strong employer demand for workers.

There are some emerging signs of softness, however. The unemployment rate ticked higher to 3.8% in August as labor force participation increased. Job growth also moderated in the latest month, though remains healthy.

Worker productivity rebounded at a 3.5% annualized pace in the second quarter, the fastest rise since 2020. Moderating labor cost growth could also help the Federal Reserve combat high inflation.

While jobless claims remain near historic lows, economists will keep a close eye on any notable changes that could indicate potential layoffs, although the Federal Reserve has recently taken a more measured approach to rate hikes aimed at moderating economic demand.

Currently, the most recent data confirms a remarkably robust job market, despite concerns about inflation and slowing growth. This resilience provides hope that any potential economic downturn in the future might be less severe than previously anticipated.

August Jobs Report Delivers Mixed Results

Posted on by cpatches

U.S. Jobs Up. Unemployment Also Up.

Today’s Report

The U.S. jobs report for August is out, with 187,000 jobs added to the economy in August. This is slightly higher than the 170,000 economists had expected. On the other side, unemployment is up slightly, at 3.8%. This is 0.3% higher than economists had predicted. Wages increased slightly, up 0.2% month-over-month, and remain up more than 4% over last year.

About the U.S. Jobs Report

The U.S. jobs report, specifically the nonfarm payroll report, is a critical economic indicator that holds immense significance for both financial markets and policymakers. This report, typically released on the first Friday of each month by the U.S. Bureau of Labor Statistics, provides crucial insights into the health of the labor market in the United States.

The report serves as a barometer of economic health. It offers valuable data on the number of jobs created or lost in the previous month, the unemployment rate, and wage growth. This information helps economists and investors gauge the overall economic performance and can influence their outlook on future economic conditions. If job creation exceeds expectations, it can signal a robust economy, potentially leading to higher consumer spending and business investments.

This report also has a significant impact on financial markets. Stock, bond, and currency markets can experience substantial volatility on the day of the report’s release. Positive job growth can boost investor confidence and lead to stock market gains, while weaker-than-expected data can trigger market sell-offs. Additionally, the Federal Reserve closely monitors the jobs report when making decisions about interest rates and monetary policy, making it a key factor in shaping the direction of these markets in the medium to long term.

In summary, the U.S. jobs report is a vital economic indicator that provides insights into the labor market’s health and has a profound impact on financial markets, influencing investor sentiment, asset prices, and even central bank decisions. It is closely watched by economists, investors, and policymakers alike for its role in shaping economic outlooks and investment strategies.

What Powell is Doing About this Vexing Inflation Contributor

Posted on by cpatches
Image Credit: IMF (Flickr)

Fed Chairman Powell Shows His Steady Hand and Firm Conviction at Monetary Conference

In what is his last scheduled public appearance before the post-FOMC statement expected on Sept. 21, Fed Chairman Powell did not say anything that would change expectations of another 75bp Fed Funds rate hike. He instead emphasized the Fed’s commitment to reduce inflation and believes it can be done and at the same time avoid “very high social costs.” 

“It is very much our view, and my view, that we need to act now forthrightly, strongly, as we have been doing, and we need to keep at it until the job is done,”  Powell said Thursday (Sept. 8) at the 40th annual Monetary Conference held virtually by the Cato Institute.

The discussion was held after it was known that the Eurozone Central Bank had just raised rates by 75bp. Powell’s talk and the interest rate hike overseas didn’t upset U.S. markets as U.S. Jobless claims had been reported earlier and showed a very strong labor market which helped demonstrate that the Fed’s actions to return inflation to a more acceptable level are not severely hurting business.

The Federal Reserve Chairman continued to reiterate what he has been saying, that the U.S. central bank is focused on bringing down high inflation to prevent it from becoming entrenched as it did in the 1970s. The core theme, most recently heard at the Jackson Hole Economic Symposium, is that he is resolved to return inflation to the Fed’s 2% target.

Mr. Powell said it is critical to prevent households and businesses from ongoing expectations that inflation will rise. He said this is a key lesson taken from the persistent inflation of the 1970s. “The public had really come to think of higher inflation as the norm and to expect it to continue, and that’s what made it so hard to get inflation down in that case,” Powell said. The takeaway for policymakers, he added, is that “the longer inflation remains well above target, the greater the risk the public does begin to see higher inflation as the norm, and that has the capacity to really raise the costs of getting inflation down.”

Speaking the day before at the Economic Outlook and Monetary Policy at The Clearing House and Bank Policy Institute Annual Conference, Fed Vice Chairwoman Lael Brainard, didn’t express a preference on the size of the next increase but underscored the need for rates to rise and stay at levels that would slow economic activity. “We are in this for as long as it takes to get inflation down,” she said.

Fed officials have raised rates this year at the most rapid pace since the early 1980s. The federal funds rate, the percentage banks charge each other for overnight borrowing, rose from near zero in March to a range between 2.25% and 2.5% in July, which is where it sits today.

Take Away

The Fed’s two mandates are to keep inflation at bay and to make sure there are adequate jobs in the U.S. The lessons of the past indicate that expectations of inflation are inflationary themselves. The Fed Chairman and Fed Vice Chairwoman would undermine their goals if they did not talk tough on inflation. With the economy not having sunk into a deep recession, and joblessness at acceptable levels, their actions are likely to match their tough talk.

The stock market typically behaves well when confident that the Fed is fighting inflation and has a steady grasp of what too far is. Overly tight money would dampen business growth.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/calendar.htm

https://www.cato.org/events/40th-annual-monetary-conference

https://www.nytimes.com/live/2022/09/08/business/ecb-meeting-inflation-interest-rates

https://www.reuters.com/markets/us/us-weekly-jobless-claims-fall-three-month-low-2022-09-08/