(Bloomberg) — Federal Reserve Chair Jerome Powell said returning to big interest-rate hikes depends on more than just Friday’s jobs report, but economists reckon just a little strength in the data will be all it takes.
Policymakers will scrutinize the February figures for three key indicators: payrolls, wage gains and the unemployment rate. If they all point to a robust labor market — perhaps even just slightly stronger than forecast — that will be a green light to a bigger hike, likely reducing suspense in the inflation reports due next week.
Economists surveyed by Bloomberg News are projecting a 225,000 increase in payrolls in February. While that would be about half the blockbuster pace seen in January, a figure in that general range or higher would confirm that the US economy remains strong and is adding jobs at a strong rate — contrary to the desire of policy makers to achieve below-trend growth to cool off price pressures.
“The stronger the number is, the risk is you are reaccelerating,” said Michael Gapen, head of US economics at Bank of America Corp (NYSE:BAC). He judged that payrolls is the most important component for the Fed because it shows “where the momentum is today,” while the jobless rate and wages are a little more backward-looking.
Powell, in two days of congressional testimony this week, said a move to a faster pace would be based on a “totality of the data” including the latest figures on employment, job openings, consumer prices and producer prices. He pointed out that recent stronger-than-expected reports were showing a resilient economy and “bumpy” inflation.
Following Powell’s initial remarks Tuesday, futures trading suggested a move to a 50 basis-point hike was more likely than a 25 basis-point hike. The Federal Open Market Committee meets March 21-22.
“If — and I stress that no decision has been made on this — but if the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes,” Powell said Wednesday.
Citigroup Inc (NYSE:C). economists on Wednesday revised their view and now see the Fed raising by 50 basis points at the March meeting. Job openings figures, released Wednesday, showed vacancies fell in January but still remained likely too high for the Fed’s liking.
The hawkish tone of Powell’s commentary left economists judging that it might take a below-forecast hiring figure of well under 200,000, as well as a clear slowdown in wages and prices, to make a 25 basis-point hike likely.
What Bloomberg Economics Says…
“If nonfarm payrolls is less than 200,000 and core CPI rises less than 0.4%, we will maintain our 25 basis-point March baseline. If jobs are above 300,000, that alone will push for a 50 basis-point hike. Anything in between would be a nail-biter. In that case, we will lean toward 50 basis points because Powell has already opened up that Pandora’s Box.”
— Anna Wong, chief US economist
While US payroll growth has topped estimates for 10 straight months, many economists saw January’s 517,000 gain as an outlier influenced possibly by seasonal adjustments.
“You would need big downside surprises in employment and inflation to get back to quarter-point hikes in rates,” said Diane Swonk, chief economist at KPMG.
The Fed has been worried about wages feeding into a potential wage-price spiral, so policy makers will also be eyeing average hourly earnings. That measure of wages likely rose by 0.3% for a second month, according to economists.
If pay climbed by 0.4% or 0.5%, “that would really cause some alarm for them,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “They care about wages right now really so far as it affects inflation. They care about if the labor market is too tight and that is feeding inflation.”
Powell has put particular emphasis on inflation in labor-intensive services businesses, where competition to hire workers has contributed to rising prices.
On unemployment, while economists expect it remained at a 53-year low of 3.4%, any further drop would indicate an even tighter market. The FOMC in December projected the level would rise to 4.6% by year’s end, based on the median estimate.
If the payrolls, unemployment and earnings reports come out with some contradictions – one strong, two weak – that could create some confusion on whether 25 or 50 basis points is the right call.
“You can have all sorts of combinations of things that can make it such that you can’t just rely on one number,” said JPMorgan Chase & Co. (NYSE:JPM) chief US economist Michael Feroli. “If it’s a mixed report, it puts more weight probably on CPI next week.”
The consumer price index report arrives March 14, followed by the producer price index the next day. Because the committee will be in a self-imposed pre-meeting blackout starting March 11, Powell and other officials won’t be commenting after those reports.
It’s not just the Fed’s read on the employment report that will be influential. Market pricing for the March meeting could be important as well, as the Fed might be reluctant to contradict bets.
“If the markets are pricing in high odds of a 50 basis-point rate increase, then this puts pressure on the Fed to follow suit since otherwise financial conditions could ease meaningfully from where they are now,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co. “It’s been hard for the Fed to get financial conditions to tighten over the past few months, so they might not want to have them unravel again.”