Fed's Powell signals rate cut as trade war outweighs strong job market.
The strong December employment report does little to clarify an economic outlook that is cloudier than it was when Federal Reserve officials voted last month to raise their benchmark interest rate.
Fed officials last month penciled in two rate increases for this year but likely will want to see several additional months of data on hiring, spending and investment before contemplating their next move.
Markets aren’t expecting the Fed to raise rates at all this year because of fears economic growth will slow much more than central-bank officials expect.
The employment report released Friday shows the job market remained healthy in December. Payrolls increased by 312,000, above the average of 254,000 jobs added per month over the past three months and the highest such average in more than two years. The unemployment rate rose to 3.9% from 3.7% in November amid a jump in the number of people looking for work.
The December payroll gain is well above the 100,000 or fewer additional jobs per month many economists expect is needed to keep up with the growth of the working-age population. That had been enough to keep the Fed on track with quarterly rate rises last year because of concerns tight labor markets and less slack across the economy could lead to overheating.
Still, the report offers less new information to the Fed because officials already judged the economy to be strong in December amid solid consumer spending, justifying their rate increase.
In the two weeks since that action, the economic outlook has turned gloomier. Market volatility has increased, stocks have tumbled, oil prices have plunged and yields on government debt have dropped sharply amid worries over a global growth slowdown. Yields on some longer-dated bonds have dropped below yields on short-term debt in recent days, an inversion that can sometimes precede a recession by one or two years.
Concerns over global growth escalated this week when Apple Inc. slashed its quarterly revenue forecast, prompted by declining sales in China, and an index of U.S. factory activity posted its largest monthly decline since 2008.
Given the fast-moving market developments and the weakening factory data, Friday’s solid jobs report might not offer the kind of evidence Fed officials will want to see as proof that the U.S. economy has weathered recent turbulence. While a weak jobs report would have been cause for alarm, a solid report doesn’t offer as much relief.
Central-bank officials will likely want to see more evidence that hiring, consumer spending and business investment held firm in the first quarter before making up their minds about how to set rates at their meetings in March or May.
The Fed is looking for signs of how tighter financial conditions in late December left a mark on the U.S. economy, and whether it is likely to push economic growth below their 2.3% projection this year. A strong January and February jobs report would offer them such a signal that the U.S. economy was holding up; a strong December jobs report doesn’t.
The December report provided continued evidence of a slow but steady rise in wage growth. Average hourly earnings of private-sector employees rose 3.2% in December from a year earlier, a new high for the expansion that began nearly a decade ago.
If job growth slows in the months ahead, an important question will be whether it reflects signs of reduced demand for workers, or if it suggests employers are running into greater trouble finding qualified workers at prevailing wages.
Friday’s report will be the last such snapshot Fed officials receive before their next meeting, Jan. 29-30. They will receive two more reports before their meeting in mid-March
While the Fed is stressing it is “data dependent,” that means it will be focused more on first-quarter data and less on data from the fourth quarter, a period in which officials already judged growth would come in above the 1.9% annual rate they project as likely over the long term.
Fed Chairman Jerome Powell is set to speak on a panel with former Fed leaders at a conference in Atlanta later Friday morning. He has said the Fed’s policy isn’t on a fixed course and will react to changes in the economic outlook.
At a news conference last month, he pointed to the Fed’s decision to throttle back plans for rate increases in 2016 after worries of a growth slowdown in China fanned fears of recession.
Mr. Powell began his news conference last month with a disclaimer that could look prescient if the economy sputters this spring. “We know that the economy may not be as kind to our forecasts next year as it was this year,” he said. “Unforeseen events as the year unfolds may buffet the economy and call for more than a slight change from the policy projections released today.”
For years, officials knew they wanted to lift interest rates higher from very low, postcrisis levels, and the main question was how fast they should go.
Now, after raising rates nine times in the past three years, there is greater uncertainty about how far to keep going and at what pace. The Fed’s December move lifted its benchmark short-term rate by a quarter-percentage point to a range between 2.25% and 2.5%.
With the unemployment rate below the 4.4% level officials deem is likely over the long run, officials will keep a close eye on how fast the economy grows relative to their projection of 1.9% in the long run. Last month, nearly all Fed officials expected growth to slow this year to a level still higher than that long-run rate, warranting continued rate increases.
If officials see growth slowing closer to the trend rate, that would reduce the urgency to continue raising rates. - WSJ
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