Fed Chair Jerome Powell is speaking today. (It will play on YouTube.)
Buckle your seat belts.
Fed’s Jerome Powell Says Hiring Surge Shows Why Inflation Fight Could Be Difficult
Central bank officials have been looking for a growth slowdown to gain confidence inflation will keep falling
By Nick Timiraos, The Wall Street Journal, Updated Feb. 7, 2023
Federal Reserve Chair Jerome Powell said the labor market’s surprising strength underscores why the central bank thinks it will face a longer battle to bring inflation down than many investors have been anticipating.
A Labor Department report Friday that showed hiring accelerated in January was “certainly strong—stronger than anyone I know expected,” Mr. Powell said on Tuesday during a moderated discussion before the Economic Club of Washington. “It kind of shows you why we think this will be a process that takes a significant period of time.”…
The process of bringing inflation down to the Fed’s goal of 2% over time “is likely to take quite a bit of time. It’s not going to be, we don’t think, smooth. It’s probably going to be bumpy,” said Mr. Powell on Tuesday. “So we think we’re going to have to do further [rate] increases, and we think we’ll have to hold policy at a restrictive level for some time.”…
The department not only reported unusually large job growth in January but — more important for the Fed — it revised previous months’ reported gains higher, suggesting the economy had entered the new year with more momentum than previously thought. Potential glimmers of softening in previous reports, such as a decline in temporary hiring or a drop in hours worked, reversed in January or were revised away…[end quote]
Notice the word “hold.” This is not a pleasant word for investors who expect the Fed to cut the fed funds rate soon after completing a raising program as they have for the past 20 years.
I read previous Fed Chair Ben Bernanke’s book, " 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19." After Paul Volcker crushed inflation (along with the economy and the stock and bond markets) by raising the fed funds rate to about 20%, inflation cooled until the Covid fiscal and monetary stimulus. The Fed carefully adjusted the fed funds rate frequently. They raised it proactively if inflation seemed to be picking up. They quickly dropped it at the first whiff of recession.
The markets have become accustomed to the Fed quickly dropping the fed funds rate.
If Powell holds the fed funds rate at a restrictive level for some time – more than a few months – as he has repeated numerous times the market will be blindsided. They simply don’t believe him.
The Fed is focused more on the labor market than goods inflation. The upward revisions by the Labor Department, released last week, coupled with their startling “adjusted” high employment level, produced a strong reaction from the Fed.
The Fed may raise the Fed funds rate more than twice more in 2023. And they won’t cut in 2023 unless there is a financial crisis. A normal recession won’t surprise them and they won’t cut.