Federal Reserve Chair Jerome Powell said Tuesday that last week’s booming jobs report underscores why officials expect to approve additional interest rate hikes to tame inflation and similar data in the months ahead could require an even sharper rise in rates than projected.
“It kind of shows you why we think this is a process that will take a significant period of time,” Powell said in a discussion at the Economic Club of Washington, D.C. “I think it underscores the message … that we have a significant road ahead to get inflation down to 2%.”
The Fed last week raised its key short-term interest by a quarter percentage point to a range of 4.5% to 4.75% and Powell said a “couple more” similar hikes were likely, in line with the Fed’s December forecast. That would push the rate to a range of 5% to 5.25% from near zero last March, capping the most aggressive flurry of rate increase in four decades.
Financial markets, however, had priced in just one more quarter-point increase. Powell said that was possible if inflation eased more quickly than anticipated, though a larger rise was also possible if inflation proved more intractable.
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On Friday, however, the Labor Department reported that employers added 517,000 jobs in January after payroll growth had slowed to a pace of under 300,000 the past three months of 2022 from more than 400,000 earlier. The unemployment rate fell to a 54-year low of 3.4%.
Strong job growth and robust employer demand for workers could spur faster wage gains that trigger higher consumer prices.
Since then, the Standard & Poor’s 500 index has fallen and Treasury yields have risen. And markets now expect two more quarter-point rate increases.
“Since the labor market report, financial conditions are more in line with (Fed rate forecasts) than they were before,” Powell said.
He did note the Fed’s aim is to lower inflation, not hobble the job market. “What we’re trying to do is get inflation down,” he said. “We’re not targeting the unemployment rate.”
Powell acknowledged inflation pulled back notably last year and Fed officials expect it to ease further in 2023. Consumer prices rose 6.5% annually in December, down from 7.1% in November and a 40-year high of 9.1% in June.
“The disinflationary process has begun,” he said.
But he also said it could be difficult to sustainably reduce inflation without cooling the labor market. He noted that a single jobs report could be a blip.
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He added, however, “If we continue to see strong labor market reports and high inflation reports that maybe we have to do more than what’s” expected in terms of hiking rates.
