April 19, 2024
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Federal Reserve officials kept interest rates unchanged this week and signaled their next move could be a cut — but they also suggested they are in no rush to make that move. Friday’s jobs data is likely to reinforce his cautious stance.

Employers hired faster than expected in January, and average hourly earnings rose 4.5 percent over the year, the fastest pace since September and a reversal after months of coolness.

Fed Chairman Jerome H. Powell made it clear during his news conference on Wednesday that the central bank is not intent on keeping interest rates high just to slow the labor market, but the report suggests the economy is largely may not be as calm as policy makers expected.

Given that continued strength, the Fed is unlikely to feel pressure to cut interest rates at its next meeting on March 19-20. Policymakers don’t want to keep borrowing costs too high for too long and risk a painful recession, but the data suggests a potential recession is still a long way off. The job market is growing rapidly instead of faltering.

The central bank’s policy rate is now set at 5.25 to 5.5 percent, a level so high that economists think it will cool the economy as it ripples through financial markets and pressure mortgages, credit cards and business lending. Puts.

The Fed aims to rein in inflation in an attempt to cool the economy, and price rises are slowing: Over the past six months, inflation figures have been close to normal.

But this has come without any widespread economic downturn. Job opportunities have shrunk and the housing market has slowed in response to higher rates, but both hiring and consumer spending have remained surprisingly resilient.

Mr Powell suggested this week that the Fed would want to see more evidence that inflation was coming under control before starting to cut interest rates and that it was unlikely to have enough data to be confident before its March meeting.

The market quickly rejected the possibility of a rate cut after the January jobs data.

In particular, Mr Powell said the Fed is willing to be patient rather than cautious and reactive – as it waits for wage growth to slow to normal levels. Some economists think the relatively fast pace of wage growth could keep inflation from plateauing at 2 percent over time, if it continues.

“I think the labor market is in many ways at or close to normal levels, but not completely back to normal,” Mr. Powell said. “Job opportunities have not come back to the level where they were,” and wage growth “still has not come back to the level where they were.”

He said wage growth “will probably take a few years to fully come back, and that’s OK.”

The strong January wage numbers came in part because employees worked fewer hours — which meant hourly earnings were measured against a smaller base, potentially inflating them. Given this, the big monthly pop should be taken “with a large grain of salt,” wrote Omair Sharif, founder of Inflation Insights.

But other signs of strength in the report were fairly broad-based.

Given Mr. Powell’s comments — and how much inflation has declined in recent months — Nationwide’s chief economist Kathy Bostjancic said the Fed could still move forward with a rate cut this year even with a very strong labor market. . He expects a fall in May or June.

“It seems like inflation is the primary driver,” Ms. Bostjancic said, compared to the strength in fresh jobs numbers. “This should have a very modest impact on the timing – and even the degree – of rate cuts.”

Source: www.nytimes.com

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