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Jerome Powell’s talk at the Economic Club of Washington, D.C. is the first time investors are hearing from him since Friday’s jobs report.
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Federal Reserve Chair Jerome Powell on Tuesday reiterated that continued interest-rate increases will be appropriate, and that the “disinflationary process” has begun, in his first remarks since January’s blockbuster jobs report.
The central bank will remain focused on the monthly data and make decisions one meeting at a time, he emphasized.
Powell’s remarks come in the wake of last week’s interest-rate increase of 0.25 percentage point, followed by Friday’s blowout jobs number. Markets have been anticipating the central bank will pause rate hikes or could even cut soon, but the stronger-than-expected employment report led some to speculate that Powell could take a more hawkish tone than seen at his news conference last week. Instead, he hardly deviated from that script.
Powell used last month’s robust hiring to highlight exactly why the central bank can’t ease up in its inflation battle just yet.
The jobs report “shows you why we think that this will be a process that takes a significant period of time,” Powell said. “The labor market is extraordinarily strong. And, by the way, it’s a good thing that inflation has started to come down, not at the cost of a strong labor market.”
Powell was speaking with
Carlyle Group
co-founder David Rubenstein at the Economic Club of Washington, D.C. Stock indexes swung higher Tuesday as the Fed chair spoke, then eased back slightly in afternoon trading. The
S&P 500
was recently 0.4% lower.
“The disinflationary process, the process of getting inflation down, has begun,” Powell reiterated Tuesday. That’s particularly true in the goods sector and is starting to show up in housing. However, services inflation—excluding housing—remains too high.
Inflation, of course, can’t be turned on and off like a light switch, and central bankers note that it is the longer-term trend that matters. The Fed’s plan is still to raise rates further, then wait and see what happens, Powell said.
“Our message was, ‘This process is likely to take quite a bit of time, it’s not going to be smooth, it’s probably going to be bumpy,” Powell said Tuesday, referring to getting inflation back to the Fed’s 2% target. “So we think that we’re going to need to do further rate increases, as we said, and we think that we’ll need to hold policy at a restrictive level for a period of time.”
Stocks surged after the FOMC increased the federal-funds rate by 0.25 of a percentage point to a target range of 4.50% to 4.75% last Wednesday. In his post-meeting news conference, Powell pointed to recent softening in goods and housing inflation, commenting that “the disinflationary process has started.”
Powell’s comments led the futures market to price in a lower peak fed-funds rate around 5% and greater odds of rate cuts in the second half of 2023. The
S&P 500
jumped 2.5% last Wednesday and Thursday, while the
Nasdaq Composite
surged more than 5%. Bond yields slid.
Then came the January employment report Friday morning. Hiring surged last month: The U.S. economy added a seasonally adjusted 517,000 nonfarm payrolls, more than doubling the job growth expected by economists. Meanwhile, the unemployment rate, at 3.4%, matched a nearly five-decade low.
A tight U.S. labor market gives the Fed more cover to raise interest rates, and hold them higher for longer, as officials wait for the cumulative tightening from the past year to bring down inflation.
The S&P 500 slid 2% in the two days following the January jobs report on Friday, while the Nasdaq had tumbled nearly 3%. Futures moved to price in an additional quarter point of rate increases this year and bond yields crept higher.
Rubenstein asked Powell on Tuesday if FOMC members had known about the January jobs number before the meeting, would they have acted differently. Powell said that while the Fed didn’t expect such strong data, he wasn’t particularly concerned about what could be an outlier jobs report.
There was a sign of progress in Friday’s report: January’s average hourly wages were up 0.3% from the prior month and up 4.4% year over year, slower than the 4.8% increase through December. That’s well above the Fed’s 2% annual inflation target, but a sign that wage growth can slow without widespread job losses.
The bottom line: inflation isn’t vanquished yet, the Fed isn’t done tightening yet, and officials will be closely watching the data to determine the timing of the central bank’s policy pivot.
“We have a significant road ahead to get inflation down to 2%,” Powell said. “There has been an expectation that it’ll go away quickly and painlessly. I don’t think that’s at all guaranteed. That’s not the base case—the base case is it will take some time and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”
Write to Nicholas Jasinski at [email protected]
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