FOMC Meeting and Jobs Report

As expected, the FOMC hiked fed funds again, this time by 25 bps, bringing the benchmark level to 450-475 bps. This is the highest fed funds has been since 2007. The FOMC’s statement noted inflation “has eased
somewhat, but remains elevated”, not declaring victory against inflation yet. At the press conference Powell acknowledged the disinflationary process has began, but stressed the FOMC is “talking about a couple of more rate hikes to get to that level we think is appropriately restrictive”.

Following the 75bp hike in November Powell said “As we come closer to that level [peak rate] and move further into restrictive territory, the question of speed becomes less important…as speed becomes less important, the terminal level of interest rates and the length the Fed will need to keep rates there take precedent.” The FOMC statement this week reflected that sentiment, replacing “pace of future increases ” with “extent of future increases”, underscoring the idea the Fed is likely a couple more rate hikes away from the peak rate this cycle. Powell as well as other Fed officials are pointing to another 25 bps hike at next month’s meeting which will bring rates close to 4.85%.

Powell did appear to have less conviction in his rate forecast than he did in December, which the market
interpreted as a slightly dovish tilt from the Chairman. Though Powell did not see the FOMC cutting rates this year, he indicated the committee would be focused on incoming economic data and consider the cumulative tightening of monetary policy already enacted. “If we do see inflation coming down much more quickly, that will play into our policy setting, of course,” Powell conceded.

To say the jobs report for January was a massive surprise is an understatement. The headline nonfarm payrolls number showed employers added 517k jobs last month, almost three times more than the market expected. The unemployment rate dropped to 3.4%, the lowest level in 53 years.

We are in an unusual environment where positive economic data is not necessarily what the market wants to see. The Fed is tightening conditions to slow growth and dampen demand to curb inflation, so the good news on the labor market does not support the soft-landing narrative. Chairman Powell had made it clear on Wednesday that the Fed is highly focused on upcoming jobs data for signs of softening…this report showed the opposite.

Yields spiked 10bps+ on the front end of the curve following the report as traders increase bets the fed funds rate will hit 5.0% this year before the Fed pause/pivot. Prior to the jobs data the futures market was pricing in a peak rate of roughly 4.9%.