Roaring job market could mess with the Fed’s plansFed chair Jerome Powell at last week’s press conference. Photo: Samuel Corum/Getty ImagesThe Federal Reserve is in risk management mode and is more worried about the possibility it will do too little to quash inflation rather than too much. Meanwhile the economy, and especially the job market, is proving surprisingly resilient.Why it matters: It creates a meaningful risk of new disruptions to financial markets — and the possibility of a hard economic landing — as the Fed tries to wrestle inflation to a place where it’s persistently low.But another possibility is that they’re both wrong, and the “terminal rate” will be even higher than the Fed or markets project. That would mean a repeat of the kind of market repricing, rise in recession fears and economic ripple effects seen over the past year.Flashback: When Fed chair Jerome Powell took questions from the media at his news conference last Wednesday, markets seized on his acknowledgment that a “disinflationary process” is underway.Powell’s full comments emphasize a risk management approach. He and his colleagues see the risks of overdoing rate hikes and as less worrying than the risk that higher inflation gets baked into the economic outlook.”I continue to think that it’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn’t get the job done, inflation springs back, and we have to go back in,” Powell said.State of play: Those were Wednesday’s thoughts. On Friday morning, the jobs numbers surely intensified the sense of those risks, with the unemployment rate hitting a new five-decade low, combined with more than half a million net new jobs.And don’t sleep on Friday’s blockbuster ISM-Services survey that showed strong growth in non-manufacturing businesses.What they’re saying: “I think the data overran the Fed last week, and Powell and his colleagues are falling behind the curve again,” said Tim Duy, chief U.S. economist at SGH Macro Advisors, in a note.What’s next: Powell speaks tomorrow at the Economic Club of Washington, followed by colleagues including New York Fed President John Williams and Governor Christopher Waller on Wednesday. We’ll be watching for any change in tone.Axios on facebookAxios on twitterAxios on linkedinAxios on emailThe Fed isn’t telling markets what to do anymoreFed chair Jerome Powell in an appearance at the Economic Club of Washington on Tuesday. Photo: Julia Nikhinson/Getty ImagesIn the communications we’ve received from Fed leadership this year, and especially over the last week, there has been a tonal shift from last year.Why it matters: Markets can rise or fall, but the Fed may prove less reactive to those shifts than it was last year and more reactive to data — particularly the kind that sheds light on price pressures.State of play: The Fed spent much of last year using a combination of words and policy actions to create higher borrowing costs for companies and consumers, in the hopes of slowing spending and bringing demand more in line with supply.Yes, but: Financial conditions have loosened since the fall, including a 16% rise in the S&P 500 since mid-October, and a drop in longer-term interest rates.In last week’s news conference, Powell addressed this mismatch with the verbal equivalent of a shrugging emoji. “There’s a difference in perspective by some market measures on how fast inflation will come down,” Powell said. “We’re just going to have to see.”What they’re saying: “Late last year Powell and other Fed speakers seemed intent on managing market expectations,” JPMorgan chief U.S. economist Michael Feroli wrote in a note yesterday.Markets bet the economy can withstand Fed tighteningRoaring job market could mess with the Fed’s plansFed chair Jerome Powell at last week’s press conference. Photo: Samuel Corum/Getty ImagesThe Federal Reserve is in risk management mode and is more worried about the possibility it will do too little to quash inflation rather than too much. Meanwhile the economy, and especially the job market, is proving surprisingly resilient.Why it matters: It creates a meaningful risk of new disruptions to financial markets — and the possibility of a hard economic landing — as the Fed tries to wrestle inflation to a place where it’s persistently low.But another possibility is that they’re both wrong, and the “terminal rate” will be even higher than the Fed or markets project. That would mean a repeat of the kind of market repricing, rise in recession fears and economic ripple effects seen over the past year.Flashback: When Fed chair Jerome Powell took questions from the media at his news conference last Wednesday, markets seized on his acknowledgment that a “disinflationary process” is underway.Powell’s full comments emphasize a risk management approach. He and his colleagues see the risks of overdoing rate hikes and as less worrying than the risk that higher inflation gets baked into the economic outlook.”I continue to think that it’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn’t get the job done, inflation springs back, and we have to go back in,” Powell said.State of play: Those were Wednesday’s thoughts. On Friday morning, the jobs numbers surely intensified the sense of those risks, with the unemployment rate hitting a new five-decade low, combined with more than half a million net new jobs.And don’t sleep on Friday’s blockbuster ISM-Services survey that showed strong growth in non-manufacturing businesses.What they’re saying: “I think the data overran the Fed last week, and Powell and his colleagues are falling behind the curve again,” said Tim Duy, chief U.S. economist at SGH Macro Advisors, in a note.What’s next: Powell speaks tomorrow at the Economic Club of Washington, followed by colleagues including New York Fed President John Williams and Governor Christopher Waller on Wednesday. We’ll be watching for any change in tone.Axios on facebookAxios on twitterAxios on linkedinAxios on emailThe Fed isn’t telling markets what to do anymoreFed chair Jerome Powell in an appearance at the Economic Club of Washington on Tuesday. Photo: Julia Nikhinson/Getty ImagesIn the communications we’ve received from Fed leadership this year, and especially over the last week, there has been a tonal shift from last year.Why it matters: Markets can rise or fall, but the Fed may prove less reactive to those shifts than it was last year and more reactive to data — particularly the kind that sheds light on price pressures.State of play: The Fed spent much of last year using a combination of words and policy actions to create higher borrowing costs for companies and consumers, in the hopes of slowing spending and bringing demand more in line with supply.Yes, but: Financial conditions have loosened since the fall, including a 16% rise in the S&P 500 since mid-October, and a drop in longer-term interest rates.In last week’s news conference, Powell addressed this mismatch with the verbal equivalent of a shrugging emoji. “There’s a difference in perspective by some market measures on how fast inflation will come down,” Powell said. “We’re just going to have to see.”What they’re saying: “Late last year Powell and other Fed speakers seemed intent on managing market expectations,” JPMorgan chief U.S. economist Michael Feroli wrote in a note yesterday.
This article was originally published by Axios.
