The US Federal Reserve has been in a rate-hiking cycle since the third quarter of 2020, with the federal funds rate currently at 4.5%. Despite the economic and labor market slowdown, the market is pricing in 100% odds that the Fed will hike a quarter-point on March 22 and 76% odds that the Fed will hike another quarter-point on May 3, bringing the federal funds rate to a 5%-5.25% range.
Fed Chair Jerome Powell has commented on the need to continue to raise interest rates “to get to that level we think is appropriately restrictive” and is of the view that it will be 2024 before inflation “get[s] close to 2%”. Neel Kashkari and Raphael Bostic have also spoken in the past couple of days and they highlighted the strength of the jobs numbers, which has raised the chances the Fed needs to be more aggressive in terms of policy tightening.
The US non-farm employment change data showed a 517,000 increase in non-farm payrolls with substantial upward revisions, including 71,000 to the previous two months while the unemployment rate dropped to a 53-year low at 3.4%. The figure is significantly greater than the Bloomberg consensus of 188,000.
However, the market hasn't been overly impacted by the jobs report, with the fact that the Fed Chair didn’t become more hawkish in the wake of the jobs report coming as a mild relief to markets. Additionally, the data may have been skewed due to reduced seasonal firings, mild weather, and labour hoarding rather than actual hirings. Moreover, in net terms, all the jobs created since March last year have been part time, predominantly in lower paid sectors.
Yesterday's senior loan officer survey from the Federal Reserve was added to the mix. Banks are tightening lending standards significantly for small, medium- and large-sized firms and are also tightening lending standards for consumer loans too, prompting a marked decline in loan demand across all markets. This suggests that financial conditions may have eased on market measures, but not for companies and households.
Overall, the US Federal Reserve is likely to continue to raise interest rates in the near future, but there is some caution in the market that the jobs report is not as strong as it appears and that the financial conditions may not be as eased as the market measures suggest.
0. “ECONOMIC OUTLOOK OP-ED: US Federal Reserve's obsession with labour market inflation could kill the global …” Daily Maverick, 9 Feb. 2023, https://www.dailymaverick.co.za/article/2023-02-09-us-federal-reserves-obsession-with-labour-market-inflation-could-kill-the-global-economy/
1. “Fed Still Looks For Disinflation Despite Jobs Shock” MENAFN.COM, 8 Feb. 2023, https://menafn.com/1105540526/Fed-Still-Looks-For-Disinflation-Despite-Jobs-Shock
2. “Absolutely Nobody Can Agree on What's Happening With the Economy Right Now” The Motley Fool, 6 Feb. 2023, https://www.fool.com/investing/2023/02/05/absolutely-nobody-can-agree-on-whats-happening-wit/
3. “A little reality check to end the week?” Marketscreener.com, 3 Feb. 2023, https://www.marketscreener.com/news/latest/A-little-reality-check-to-end-the-week–42891585/