What did you know and when did you know it? If one were to pose that Watergate-era question to Federal Reserve Chairman Jerome Powell, on the issue of whether he gets an advance peak at key economic data, he could respond persuasively that he was as surprised as anybody by January’s blockbuster job numbers.
The 517,000 boom in nonfarm payrolls was more than 2½ times economists’ consensus forecast. The unemployment rate, derived from a different survey of households, fell to 3.4%, a level not seen since the mid-1960s. Digging deeper into the data revealed other robust details beyond the splashy headline numbers.
If he had seen Friday’s report early, would Powell have shaded his news conference commentary differently following Wednesday’s Federal Open Market Committee’s as-expected quarter-point increase in its federal-funds target range, to 4.50%-4.75%?
The panel’s policy statement did stick to the previous script, saying that “ongoing” interest-rate hikes would be appropriate, as anticipated here a week ago. But Powell’s verbiage and body language led financial markets to infer that the end of rate increases might be near and that cuts could even be in the offing later in the year.
To a question about whether the FOMC discussed a pause in rate boosts, he responded by referring to the minutes of the meeting, which won’t be published for about three weeks. He also gave less emphasis to the recently reported rise in unfilled positions in the December Job Openings and Labor Turnover Survey, a number he previously had focused on as indicating a tight labor market.
Most meaningful was how Powell parried a question about whether the Fed would reverse course and trim rates if inflation came down faster than indicated in the December Summary of Economic Projections, the most recently released. If that were to happen, he said “that will be incorporated into our thinking about policy.” Translation: fewer rate hikes or later rate cuts.
More curious was the Fed chief’s characterization of financial conditions beyond the overnight fed-funds rate that the central bank sets. Powell said they are tighter than they were a year ago, when the Fed signaled it was set to firm policy. But in the past three months or so, they’ve gotten easier as measured by various gauges, including one from the Chicago Fed. While the FOMC lifted the fed-funds rate by a total of 1.5 percentage points over the past three policy meetings, bond yields have been falling, reducing borrowing costs for companies and home buyers. The
U.S. Dollar Index
is off about 10% from its 2022 peak, a boon to U.S. corporations competing globally. And, of course, the
S&P 500 index
is nearly 16% above its mid-October low.
While financial conditions have eased over the past few months, the jobs numbers suggest little slowing in the economy. To be sure, the blowout January report contained a number of statistical quirks. In the first month of every year, raw payrolls drop sharply, which seasonal adjustments compensate for.
Last month’s unadjusted decline of 2.5 million was the smallest for any January since the mid-1990s, which suggests that employers are trying to hang on to workers in a tight labor markets, even though that cuts profits, writes J.P. Morgan’s chief U.S. economist, Michael Feroli. Similarly, the workweek jumped by 0.3 hours, to 34.7, because fewer employees than normal lost time to bad weather in an unusually mild January, according to Joshua Shapiro, MFR’s chief U.S. economist.
The Fed might take comfort from the reading on average hourly earnings, which rose just 0.3% in January, but that was after upward revisions in previous months. Combined with the sharp payrolls and workweek gains, wage income and industrial output should be up strongly for the month.
None of which is conducive to reducing inflation to the Fed’s 2% annual target, contend John Ryding and Conrad DeQuadros, economists at Brean Capital, in a research note. On Friday, fed-funds futures returned to pricing in additional quarter-point boosts in May and June, which would bring the key policy rate to 5%-5.25%, consistent with the latest Fed year-end projections.
But the futures and other rate markets continue to price in subsequent rate cuts later in the year, an expectation that has heartened bond and stock bulls. The shockingly strong jobs numbers suggest that they might be disappointed.
Write to Randall W. Forsyth at email@example.com