Hot jobs report supports Powell's view

Markets and the Federal Reserve continue to view the economy differently and work on separate time frames. 

In his press conference after the FOMC meeting last week, Fed Chair Jerome Powell seemed to talk tough, indicating he expects two more rate hikes before the Fed pauses to assess the impact of the tightening so far. He spoke to the difficulty of factoring in unprecedented risks posed by the pandemic. He clearly said that while some inflation measures have slowed or even declined, labor-based inflation has yet to follow, given the tight labor market. In short, he highlighted the hard work ahead. 

Markets, however, focused on Powell’s seeming acquiescence to looser financial conditions, inferring the Fed was comfortable with current conditions. He pointed to the magnitude of total hikes already made—with a couple more likely—and to real inflation rates moving into positive territory as historically indicating tight conditions. Yet markets focused on the economy’s moderation since fall, sensing the Fed may be nearing an end to hikes. This divergence in views led to a sharp rally, which actually loosens conditions further. 

Complicating the narrative was the robust January employment report, which was well-above expectations. The Labor Department said Friday that employers added 517,000 new jobs, more people joined the labor force and the unemployment rate fell to 3.4%, the latter matching levels not seen since May 1969. Leisure, hospitality, education and health care had the largest gains. Tech jobs declined, confirming the much-publicized layoffs at large tech companies. As more lower-paid jobs were added, overall average hourly earnings rose 0.3% in January, less than the 0.4% in December. The labor market remains tight.

So what happens next? Other economic data point to further signs of slowing, as evidenced by the purchasing manager survey falling to its non-pandemic low of June 2009. But other data, namely the ISM services index, point to expansion. The Fed will take into account all the data as it weighs what to do at its next meeting, March 22.