Manuel Bales Cenetta/AP/Shutterstock/Manuel Bales Cenetta/AP/Shutterstock
Just days after the Federal Reserve’s first meeting of 2023 and a surprisingly massive January jobs report, all eyes were on Jerome Powell’s February 7 remarks.
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Speaking at the Economic Club of Washington, Powell said that the deflationary process “has begun,” however, adding that “it’s got a long way to go. These are very early stages of deflation.”
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Commenting on the jobs report, he said it was “stronger than expected” and that the process would take “a bit of time” and would probably be “rough”. In turn, he said the Fed would need to keep policy at restrictive levels for a “period of time” and that further rate hikes would be required.
“Investors were encouraged by comments from Fed Chair Powell, as the CBOE Volatility Index declined and bond yields slipped, while equity markets rose, as he said the process of reducing inflation is underway,” it said. While the deflationary forces have begun, there is still a way to go,” said Sam Stovall, chief investment strategist at CFRA Research.
Stovall said the CFRA sees the FOMC raising rates by 25 basis points two more times, ending early Q2 between 5.00%-5.25%.
Powell’s comments also come after Minneapolis Federal Reserve President Neel Kashkari told CNBC the same day that the Fed is still working to control inflation in light of the explosive job report.
“Neil Kashkari reminded investors that the Fed has a ways to go before the halving. However, he has generally been quite hawkish,” Stovall said. “In the end, the data will decide when the Fed stops and then when they start cutting rates.”
According to the Bureau of Labor Statistics, the country added 517,000 jobs in January and the unemployment rate fell to 3.4%. In comparison, economists were expecting a gain of 185,000 jobs, according to CNN.
Chris Zaccarelli, CIO of the Independent Advisors Alliance, said that while the “off the charts” job numbers were good news for the economy, “it’s not good news for the Fed or their inflation fight.”
“Paradoxically a stronger-than-expected economy could be the worst thing for markets in the medium term, as it will lead to more tightening by the Fed and even bigger problems down the road for markets as interest rates go higher, And stay high for a long time,” he said.
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On February 1, as expected, the Federal Reserve scaled back its hike, unanimously saying it would raise interest rates by a quarter point for its first meeting of 2023. This was the eighth (and smallest) rate hike since March 2022, as GOBankingRates reported earlier.
This latest, smallest increase followed December’s 50 bps increase and four consecutive 75 bps increases. While this deceleration was welcomed, it did not yet represent a dovish pivot, as Fed officials said in a statement that “inflation has eased somewhat but remains high.”
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