“At this point, the torrent of good news feels like a delayed apocalypse,” said Aaron Terrazas, chief economist at Glassdoor. “There is a lot of anxiety [among business leaders] that this report means that interest rates will rise, making borrowing more expensive, which will dampen consumption and investment. It feels like it just kicks the box further down the line.
A recent string of good economic news could lead the Federal Reserve to raise interest rates even more aggressively, raising the risks of a deeper economic downturn, including job losses and bankruptcies. businesses later this year. Already higher interest rates played a role in the collapse of Silicon Valley Bank.
Wall Street was on edge after Friday’s jobs release. The stronger-than-expected jobs report and the collapse of Silicon Valley Bank sent all three major indexes down at least 1% at Friday’s close.
“It’s been an incredible rollercoaster,” said Liz Ann Sonders, Charles Schwab’s chief executive. “It is difficult to distinguish to what extent the change in perception is based on various elements of the employment report or [Silicon Valley Bank]or a combination of both.
The Federal Reserve has raised interest rates rapidly over the past year, hoping to cool the economy enough to bring inflation down. For a while, it seemed to work: inflation eased slightly, job growth slowed, and households and businesses seemed to shrink.
But since January, a flurry of strong economic data has rekindled fears that the central bank’s efforts have not gone far enough. In testimony before Congress this week, Fed Chairman Jerome H. Powell cited a slew of year-to-date data from strong job gains, robust consumer spending and stubborn inflationary pressures as reasons why rates may need to rise – and potentially faster.
“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” Powell told the Senate Banking Committee on Tuesday. “If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes.”
Some economists now expect that when the Fed meets later this month it could raise interest rates by half a percentage point, double what was previously expected. Given that it may take months for higher borrowing costs to trickle down to the economy, there are concerns that the end result could be a bigger slowdown than expected.
“Two or three months ago, there was a feeling that we could achieve a ‘Goldilocks scenario’ – that job growth could slow without a big decline,” said Matt Colyar, economist at Moody’s Analytics. “But the last few months have really complicated that narrative. It is becoming increasingly clear that the Fed will have to speed things up.
New inflation data released on Tuesday will provide another snapshot of the Fed’s progress and will factor into its next decision. Inflation, which peaked last summer at 9.1%, has fallen for seven consecutive months, although there are fears the momentum has stalled. Overall, prices were up 6.4% from a year ago.
The latest jobs report, released on Friday, included some signs of a slowdown. The unemployment rate rose from 3.4% to 3.6% as more people joined the labor force. Wage growth also slowed, although it was unclear to what extent average hourly wage figures were skewed by the composition of jobs in the economy. Employers added jobs in lower-paying sectors, such as retail, leisure and hospitality, last month, while laying off better-paid office workers.
Yet the economy continues to generate hundreds of thousands more jobs per month than it takes to keep up with population growth.
“Labour market resilience is a blessing and a curse,” said Diane Swonk, chief economist at KPMG. “When you generate 815,000 new paychecks in the first two months of the year, that’s staggering and it means the Fed needs to keep hammering to slow underlying inflation.”
For now, the Fed remains stuck between its two main objectives: keeping inflation low and employment high. Achieving both in the long term without significant fallout is becoming more and more of a challenge.
Lawmakers on both sides of the aisle grilled the Fed chairman this week on the possibility that higher interest rates could lead to millions in job losses. Sen. Elizabeth Warren (D-Mass.) asked Powell what he would tell people who may be out of work if the central bank continues to raise rates and causes a downturn.
“I would explain to people … that inflation is extremely high and it is seriously hurting the workers of this country,” Powell said. “We are taking the only measures we have to bring inflation down.”
Rachel Siegel contributed to this report.