WASHINGTON, March 5 (Reuters) – Richmond Fed president Tom Barkin said still high inflation and stronger recent jobs numbers may shift the Fed’s risk outlook at a time when the U.S. conflict with Iran could further push up key consumer prices.
Fed rate cuts last year were based on “the sense that the risks of the labor market were up while the risks to inflation were down. The data that’s come in over the last couple months suggests it has moved in the other direction,” Barkin said on Bloomberg Television.
“With the PCE numbers that we’re expecting next week, you’ve got a couple months of relatively high inflation. That certainly puts pause to any conclusion that we’re done fighting this,” Barkin said of a coming report expected to show the Personal Consumption Expenditures price index still about a percentage point above the Fed’s 2% target.
The Fed meets on March 17-18 to assess what is now a rapidly shifting landscape with the U.S. involved in what the Trump administration says will be open-ended military action in Iran. The war is pushing up crude oil prices, testing the global economy with an unpredictable set of risks, and reshaping U.S. markets with higher interest rates on Treasury bonds and eroding investors’ hopes for Fed rate cuts.
Jobs data for February will be released on Friday and has become an important touchpoint. Unexpectedly strong job growth in January, when the economy added 130,000 new positions after a year when employment growth nearly stalled, tempered views among officials that the labor market might be on the verge of a serious slide that warranted immediate rate reductions.
But with much of the private employment growth focused in a single industry, healthcare, those concerns have not vanished. Economists polled by Reuters expect employment growth to have cooled in February to around 59,000.
While low by historical standards, that number is now considered roughly what the economy needs at a time of restricted immigration to hold the unemployment rate steady, and consensus projections are for the jobless rate to remain unchanged at 4.3%.
Some see risk of an upside surprise, which would further cement expectations for the Fed to remain on hold until new data shows either clear cracks in the job market or a change in the path of inflation.
New data from Vanguard based on analysis the investment firm has been developing of 401k plan data points to private job growth of 81,000, with a labor market that “looks less like the start of a downturn and more like quiet resilience,” Vanguard senior economist Adam Schickling wrote.
Payroll processor ADP’s monthly employment report also pointed to a higher than expected increase in private jobs, while a Chicago Federal Reserve estimate, based on a combination of official statistics and private data, put the February unemployment rate unchanged at 4.3%.
Apollo chief economist Torsten Slok said recent improvements in data on things like production and factory orders indicated that “nonfarm payrolls could be significantly stronger than….currently expected by consensus.”
Investors have already begun lowering their expectations for Fed rate cuts following the outbreak of the U.S. conflict with Iran and the ensuing jump in fossil fuel prices. Brent crude has risen about 15% to over $83 dollars a barrel from late February, and U.S. gas prices are following suit.
The U.S. economy is more buffered than Europe and many other nations from rising energy costs. However, the uncertainties around the conflict have clouded a Fed outlook that had been coming more into focus with an expectation of slowly falling inflation this year and, eventually, further rate cuts.
Led by incoming Fed chair Kevin Warsh, nominated by President Donald Trump to take over when current Chair Jerome Powell’s leadership term ends in May, the central bank had been expected to pivot to rate cuts in June based on faith in the impact of administration policies on growth and productivity.
Those bets are now shifting out, with rate cuts not seen until perhaps September, and perhaps only a single quarter point cut this year. Rising yields on U.S. Treasury securities could pose a different challenge if financial conditions begin to tighten broadly and threaten to slow the economy. That would potentially leave the Fed facing both rising prices and risks to growth, a challenge for policymakers tasked with maintaining both stable prices and maximum employment.
“Obviously, you watch oil prices. While the U.S. is no longer a net importer, it’s still the case that the price at the pump matters a lot in terms of sentiment, in terms of crowding out other spending,” Barkin said. “They’ve jumped up over the last week. You can see that when you drive around. But of course, no one knows whether this is going to be short term or long term.”
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)
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