The Federal Reserve is expected to slow its campaign to slow inflation by hiking interest rates despite the release Friday of an employment report for November that showed that the labor market is still hot.
Since the start of the year, the central bank has jacked up its interest rate target by a whopping 3.75 percentage points in an attempt to squelch the country’s excruciating inflation — the most aggressive pace of hiking since the Great Inflation decades ago.
Fed Chairman Jerome Powell has made it clear that the Fed won’t let up with its rate-hike campaign until inflation is falling toward the Fed’s 2% target — it’s running at 6% in the most recent reading — but recent comments indicate that it will slow the increases.
Powell indicated during a speech this week that the Fed, at its December meeting, would only raise rates by half a percentage point rather than the three-quarters of a percentage point hikes of the past several meetings.
ECONOMY BEATS EXPECTATIONS WITH 263,000 JOBS IN NOVEMBER, UNEMPLOYMENT AT 3.7%
“The full effects of our rapid tightening so far are yet to be felt,” Powell said during a speech at the Brookings Institution. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.”
Friday’s jobs report, which showed the economy adding 263,000 jobs while the unemployment rate remained at a low 3.7%, won’t change the Fed’s plans, even though it suggests that the labor market is still putting upward pressure on inflation.
Desmond Lachman, a senior fellow at the American Enterprise Institute, said that Powell was very careful with the language he used during the Brookings speech and used it to express the view that while interest rates need to remain elevated for the near future, the increases will not be as aggressive as they have been.
“I’m pretty sure that he’ll go the 50 basis points,” Lachman told the Washington Examiner on Friday.
Investors are now pegging the odds of a 50 basis point hike nearly 80% and pricing in about a 20% chance of a 75 basis point hike, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed — even after Friday morning’s strong jobs report. That shows that the prevailing sentiment is that this single report isn’t causing alarm bells to ring at the Fed.
The report showed that the Fed’s tightening campaign has not yet begun hitting the labor market. That will reinforce the view among Fed officials that they need to keep rates at an elevated level even if the pace of increases slows.
The tightening comes at a price. Lachman said he expects a recession sometime next year in response to the barrage of rate hikes that the Fed has conducted.
Most economists now foresee the economy contracting and shedding jobs.
Economists with Oxford Economics projected Friday that job growth would stall next year and become negative in the second quarter and that the unemployment rate would rise a percentage point.
In an analysis after Friday’s report, PNC chief economist Gus Faucher noted that PNC’s baseline forecast for next year features a “mild” recession, with the unemployment rate climbing to about 5.5% by early 2024. Minus the pandemic, that would market the highest unemployment rate in more than five years.
Economists will pay close attention to the Fed meeting scheduled for the 13th and 14th because the central bank will update its projections for gross domestic product growth, unemployment, and inflation for the first time since September. At its September meeting, the Fed’s projections trended in a bad direction, indicating higher-than-expected inflation and slashed GDP growth.
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The soon-to-be-outdated projections predicted that the unemployment rate would tick up to 3.8% by the end of the year and 4.4% by 2024.
