Chair Powell’s semiannual testimony before Congress and labor market data releases dominated the economic calendar this week.
Powell noted recent data had reversed the softening economic trends observed in the past few months, some of which he attributed to unseasonably warm weather in January. He reiterated the labor market was very tight and inflation well above the Fed’s target. Powell testified “the ultimate level of interest rates is likely to be higher than previously anticipated” and “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”.
His attitude has changed since the Fed’s decision last November, when he said that how high rates ultimately go and how long they stay there is more important than how much the Fed hikes at any single meeting. They also contradict Chair Powell’s assertion at the January 2023 interest rate decision meeting press conference that the disinflationary process had begun. Financial markets swiftly raised the odds of a 0.50 percentage points (pp) hike at the March interest rate decision meeting to around 75% following Powell’s testimony. The odds of a 0.50 pp hike fell to below 50% following the release of the softer wage inflation data today, which lessened the likelihood the Fed will have to hike faster to fight inflation.
The U.S. economy added 311,000 jobs in February, exceeding consensus expectations for a 200,000 gain. Prior two months’ employment figures were revised down by a combined 34,000 jobs. More Americans looked for jobs last month, pushing the labor force participation rate higher by 0.1% to 62.5% and the unemployment rate by 0.2% to 3.6%. Average hourly earnings rose 0.2% in February, below forecasts for a 0.3% increase and was up 4.6% from a year-ago in February compared to 4.4% in January.
The Job Opening and Labor Turnover Survey (JOLTS) reported 10.824 million job openings in January, a decline of 410,000 from the upwardly revised 11.234 million vacancies in December. Other details of JOLTS also showed the labor market cooled: The number of hires was unchanged; Employees who voluntarily quit decreased, indicating waning employee confidence in labor market mobility; and Layoffs and discharges increased.
Bill Adams is senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.