A strong January jobs report will make the Fed’s battle with inflation more difficult

The resilience of the labor market in the face of rising interest rates and stubborn inflation continues to surprise economists. The U.S. economy added 517,000 in January, pushing the unemployment rate to a 53-year low of just 3.4 percent, the Bureau of Labor Statistics said Friday.

The numbers were more than double economists’ forecasts for 188,000 new jobs and well above December’s gain of 260,000. Also, revisions to last year’s jobs data revealed that employers added an estimated 311,000 jobs more than predicted earlier in the year.

While the job gains are great news for the economy as a whole, for the Federal Reserve, which has been trying to quell inflation with interest rate hikes for nearly a year, they could be another setback in its war to reduce inflation.

“Job creation in January was impressive,” said BMO Wealth Management Chief Investment Strategist Yung-Yu Ma. “Unless this strength in the labor market turns out to be a one-month breakout … the Fed is likely to hold on tight and keep rates higher for longer.”

To cool the economy, Fed officials have raised interest rates eight times since last March. And in December, evidence of their work began to show when annual inflation, as measured by the consumer price index, fell to 6.5% – from 9.1% at its peak in June. But Ronald Temple, chief market strategist at asset manager Lazard, said Wealth that the latest jobs report shows that “the battle with inflation is far from over.”

“The job market is extremely tight,” he said. “The clear takeaway for the Fed should be that financial conditions remain too loose to ensure that inflation returns to the 2% target.”

Is good news still bad news for markets?

For investors, a strong labor market is usually good news, but it’s been a different story over the past year.

As the Fed tried to slow the economy to fight inflation, every time investors got positive news about unemployment or consumer spending, they feared it would force officials to raise interest rates even more to slow growth. of consumer prices. Some experts believe that this “good news is bad news” phenomenon, as it has come to be known, continues to this day.

This was said by the chief economist of Raymond James, Eugenio Aleman Wealth that while the latest jobs report is “excellent news” for the US economy, it is “probably not good news” for investors or the Fed, “which wants to see a significant weakening of employment before it finishes raising interest rates.”

The Fed’s journey toward price stability may take longer than investors or central bank officials expect, according to Quincy Crosby, chief global strategist for LPL Financial.

“Undeniably the strong report is what markets are hoping to get out of a recession, but not what you want to see when expectations of the end of the Fed’s rate hike campaign are suddenly challenged by a significantly stronger labor market “, he said.

Markets’ reaction to the news, however, was more muted than expected — even amid disappointing earnings for major tech giants Apple, Amazon and Google parent Alphabet after the bell on Thursday. The S&P 500 was down just over 0.5% by Friday afternoon, and the tech-heavy Nasdaq — which is usually more affected by potential interest rate hikes — was down roughly 1%.

A better-than-expected reaction to the latest jobs report from investors and Chairman Powell being seen as upbeat this week at his latest news conference could mean the era of “good news is bad news” is over, according to B. Riley Art Hogan of Financial.

“We are now nearing the end of the tourism cycle and the good news can start to be seen as good,” he said CNBC in Friday. “I think we’re finally getting into a place where we can have intuitive reactions to economic data, and today might be an example of that.”

A soft landing?

Recession predictions have poured in from Wall Street, Fortune 500 CEOs and billionaire investors over the past year, but recent surprise strength in labor market data has some experts saying the Fed could still manage a “soft landing” – where inflation declines without causing a recession.

“The extraordinary flexibility and adaptability inherent in US labor markets … has given further credence to the potential that a soft landing for the economy is not as elusive as many have assumed,” said Rick Reeder, chief investment officer of BlackRock’s Global Fixed Income Wealth Friday.

Ridder argued that central banks may not have to “sacrifice as many jobs as previously thought” to slow global inflation.

“We think the Federal Reserve would be well-served to see this as a success, and we think slowing the pace of hikes (and potentially ending them over the next few months) will allow the labor market to flex, but perhaps not broke,” he said.

But recently, economists have noted that measuring the health of the economy has become increasingly challenging because of conflicting data.

“It’s a pretty messed up picture,” former Treasury Secretary Larry Summers said Bloomberg Friday. “The labor market is working very differently than a lot of other indicators in the economy, where there are some signs — especially in manufacturing — of a real slowdown … I think it’s as difficult an economy to read as I can remember.”

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