“At this point, the flow of good news feels like an apocalypse,” said Aaron Terrazas, Glassdoor’s chief economist. “There is a lot of anxiety [among business leaders] this report means that interest rates will rise, making borrowing more expensive and curbing consumption and investment. There’s a sense that it’s just about kicking the can down even further.”
Recent strong economic news could prompt the Federal Reserve to raise interest rates even more aggressively, raising the possibility of a sharp economic slowdown later this year, including job losses and business setbacks. Already high interest rates have contributed to Silicon Valley’s bank collapse.
Wall Street was on the upswing after Friday’s jobs release. A stronger-than-expected jobs report and a Silicon Valley bank collapse sent all three major indexes down at least 1 percent by Friday’s close.
“It’s been a great rollercoaster,” said Liz Ann Saunders, managing director of Charles Schwab. “It is difficult to distinguish how much of the change in employment is based on different components of the jobs report or [Silicon Valley Bank]or a combination of the two”.
The Federal Reserve has raised interest rates rapidly over the past year, hoping to cool the economy to reduce inflation. For a while, it seemed to work: inflation fell, job growth slowed, and households and businesses seemed to be pulling back.
But a flurry of strong economic data since January has stoked concerns that the central bank’s efforts are not enough. In testimony before Congress this week, Fed Chairman Jerome H. Powell cited a hot streak of year-to-date data on strong job growth, robust consumer spending and sustained inflation pressures as evidence that rates are likely to rise, and potentially sooner. .
“The latest economic data was stronger than expected, suggesting that the final level of interest rates may be higher than previously expected,” Powell told the Senate Banking Committee on Tuesday. “We would be prepared to increase the pace of rate hikes if the data set suggests that more rapid tightening is warranted.”
Some economists now expect the Fed to raise interest rates by as much as half a percentage point when it meets later this month – more than double what had previously been forecast. As higher borrowing costs could take months to work their way through the economy, there are concerns that the bottom line could be a deeper-than-expected slowdown.
“Two or three months ago, there was a perception that we could reach a ‘Goldilocks scenario’ – that job growth could slow without a sharp decline,” said Matt Kolyar, an economist at Moody’s Analytics. “But the last few months make that conversation difficult. It’s becoming clear that the Fed will have to adjust the situation.”
New inflation data due on Tuesday will provide another snapshot of the Fed’s progress and factor in its next move. Inflation, which peaked at 9.1 percent last summer, has fallen for seven straight months, but there are fears that momentum has stalled. The total price increased by 6.4 percent compared to last year.
The latest jobs report released on Friday contained some signs of weak momentum. As more people joined the labor force, the unemployment rate rose from 3.4 percent to 3.6 percent. Wage growth also slowed, although it was unclear how much the composition of jobs in the economy skewed average hourly earnings. Employers added jobs last month in low-wage industries such as retail, leisure and hospitality, while shedding higher-paid office workers.
Still, the economy continues to create hundreds of thousands more jobs each month than it needs to keep up with population growth.
“Labor market stability is both a blessing and a curse,” said Diane Swank, chief economist at KPMG. “When you have 815,000 new hires in the first two months of the year, that’s amazing, and that means the Fed needs to keep hitting to moderate core inflation.”
For now, the Fed is torn between its two main goals: keeping inflation low and employment high. Achieving both long-term outcomes without a significant downturn is proving difficult.
This week, lawmakers from both parties debated the Fed chairmanship amid speculation that higher interest rates could lead to millions of job losses. Sen. Elizabeth Warren (D-Mass.) asked Powell what he would say to people who may be out of a job if the central bank raises rates and triggers a recession.
“I would explain to people that inflation is very high and it’s going to hurt the working people of this country very badly,” Powell said. “We are taking the only measures to reduce inflation.”
Rachel Siegel contributed to this report.
