It is already clear that the Federal Reserve is poised to raise interest rates by a quarter point this month as it seeks to make borrowing more expensive in a bid to calm the economy.
Central Bank Chairman Jerome H. Powell said so this week.
But February jobs data released on Friday could inform policymakers as they discuss central bank balance sheet reduction plans (something that may squeeze some more juice out of the economy) and present estimates. how quickly interest rates will rise in the months ahead.
Given that an increase in March is widely expected, the forecasts presented in the Summary of Economic Projections that the Fed releases alongside its rate decision will likely take center stage.
Russia’s invasion of Ukraine has made the path ahead more uncertain for the Fed, so the economic projections will serve more as a blueprint than a blueprint.
But what happens next also depends in part on how buoyant the Fed thinks the labor market, wage growth, and the broader economy is this year, and how well it expects booming labor market pushes up prices.
Unemployment has fallen sharply over the past year. When Fed officials last released their economic projections in September, they thought the unemployment rate would go down to 3.5% – its level before the start of the pandemic – by the end of the year. In February, it fell to 3.8%.
As jobs proved plentiful and workers were hard to find, wages began to rise rapidly. Economists polled by Bloomberg expect average hourly wages to have risen 5.8% in February. That’s about twice as fast as the pace that prevailed during the long pre-pandemic economic expansion.
Even though rapid wage gains don’t quite keep up with rapid inflation for many income groups, they have raised the possibility that labor costs could start to fuel higher prices, triggering an upward spiral . This possibility makes central bankers nervous.
“The big thing we don’t want is for inflation to take root and become self-perpetuating,” Powell said in congressional testimony this week. “That is why we are moving forward with our program of raising interest rates and controlling inflation.”
And that’s why officials will likely be watching new data closely as they try to get a sense of how the economy will progress this year.
Chris Waller, a Fed governor, said late last month that he could support an aggressive start to Fed interest rate hikes if inflation reports and the jobs report from February showed “that the economy is still extremely hot”.
While Mr. Powell appears to have dismissed the idea of a big rate hike in March, Mr. Waller’s emphasis demonstrated just how closely the central bank is monitoring this jobs report at a critical time. Mr. Powell has previously clarified that the wage data in particular caught his attention.
But officials will have to weigh the strength of the labor market against what is happening in Ukraine. And it’s not obvious at this point how that might affect the way forward for policy, since the war is driving up gasoline prices but may weigh on consumer spending.
“A further increase in energy prices – which has so far been the main channel through which the attack has affected the US economy – creates a dilemma for monetary policy: higher inflation and slower growth. “said Michael Feroli, chief U.S. economist at JP Morgan. wrote in a research note Thursday.
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