Jobs Data Confirm Higher Interest Rates are Coming

Non-farm payrolls jumped 517,000 last month, and the unemployment rate fell to a 53-year low.

The strong January jobs report likely won’t alter the Federal Reserve’s policy plans much. But it may lead investors to more realistic notions of what those plans are.

Non-farm payrolls soared 517,000 last month, after an upwardly-revised 260,000 gain in December. And the unemployment rate fell to 3.4%, the lowest since May 1969.

Average hourly wages rose 0.3%, producing a gain of 4.4% for the 12 months through January. While that 12-month figure is the lowest since Aug. 2021, it’s still far above the Fed’s overall inflation target of 2%.

So it stands to reason that the Fed remains on course to raise rates by 25 basis points in both March and May from the current range of 4.5% to 4.75%. The Fed will likely then pause to see if it needs to tighten further to push inflation toward the central bank’s target.

Meanwhile, the higher Fed rates could mean higher rates on loans for you too, such as credit-card debt.

Powell: Rate Cut Unlikely This Year

Fed Chairman Jerome Powell said after the central bank’s meeting Feb. 1 that it’s highly unlikely he and his colleagues will pivot to cutting interest rates this year. And the latest job numbers seem to confirm that view.

But interest-rate futures indicate that traders still expect the Fed to trim rates later in 2023. I would assume the Fed will remain steadfast on its path. So it will be interesting to see how traders and investors react when they realize indeed no rate cuts will be forthcoming.

Given the way stock and bond markets have soared during recent weeks in anticipation of a more dovish Fed policy, the result could be quite negative for both markets.

Fed Wants Tighter Financial Conditions

That would seem to fit the Fed’s desire for tighter financial conditions, which means weaker stocks and weaker bonds (higher yields).

To be sure, Powell hinted that the Fed doesn’t isn’t too bent out of shape by the financial-market gains of recent months. "Many things affect financial conditions, not just our policy,” he said. “And we will take into account overall financial conditions along with many other factors as we set policy.”

But the Fed is still concerned, many experts note. “This loosening of financial conditions is undoubtedly not what the Fed was aiming for, and we expect a cacophony of Fed speeches in the coming weeks will aim to reorient the Fed’s message,” Gregory Daco, chief economist at EY Parthenon, told The New York Times.

“In other words, the infernal tango will continue, as the Fed and markets try to find synchronized rhythms once again.”