Job Growth Exceeds Expectations
Last week the Federal Open Market Committee (FOMC) met and left interest rates unchanged. In their statement, they reiterated that while pleased with progress in reducing inflation, they want to see it sustainably move towards their 2% target. Fed Chair Powell indicated March is likely too early to see sustainable disinflation, hinting against a rate cut then. In March, the Fed will provide an updated economic expectations reading.
Against this cautious backdrop we received strong jobs data, with 353,000 payroll gains beating expectations of 185,000. Upward revisions to November and December added another 126,000 jobs. The unemployment rate held at 3.7%.
Hourly earnings also rose 0.55% monthly, with 4.48% year-over-year growth.
The only downside was a decline in weekly hours to 34.1, reducing household income gains.
Manufacturing Activity Still Sluggish
ISM manufacturing ticked up to 49.1 but remains in contraction for the 15th straight month.
Fed Focused on Sustainable Disinflation
In the press conference, Chairman Powell also mentioned that while they focus on the aggregate number for inflation, the recent lowering of inflation was primarily due to deflation in goods while services remains elevated. This implies that reaching a more broad-based sustainability would require inflation in services to come down as they expect deflation in goods to slow down. If manufacturing strengthens further, fueling goods inflation again, they will likely maintain patience. The Fed’s caution is warranted and rate cuts may not come until late 2024.
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