Markets
Barrons Digital News said The ‘Disinflationary Process’ Has Begun
Feb
Barrons Digital News informed Powell began speaking to Carlyle Group CG –2.29% co-founder Rubenstein at the Economic Club of Washington, D.C., on Tuesday around 12:40 p.m. ET.
Jerome Powell declared to Barrons Digital News “The message we were sending at the [Federal Open Market Committee] meeting last Wednesday was really that the disinflationary process, the process of getting inflation down, has begun,” Powell said. That is particularly true for the goods sector and is starting to show up in housing, while services inflation—excluding housing—remains too high.
Powell explained that he wasn’t too concerned with one potentially outlier month of jobs data.
“Our message was, ‘This process is likely to take quite a bit of time, it’s not going to be smooth, it’s probably going to be bumpy,” Powell said. “So we think that we’re going to need to do further rate increases, as we said, and we think that we’ll need to hold policy at a restrictive level for a period of time.”
Stocks surged after the FOMC increased the federal-funds rate by 0.25 of a percentage point to a target range of 4.50% to 4.75% on Wednesday. In his post-meeting press conference, Powell pointed to recent softening in goods and housing inflation, commenting that “the disinflationary process has started.”
Get Wall Street Journal 2-Year Print Subscription for $480
Then came the January employment report on Friday morning. Hiring surged last month: The U.S. economy added a seasonally adjusted 517,000 nonfarm payrolls, more than doubling the job growth expected by economists. Upward revisions to November and December hiring totaled another 71,000 jobs. The unemployment rate at 3.4% matched a nearly five-decade low and job openings data earlier last week showed an increase in unfilled positions.
The data show the U.S. labor market remains tight, giving the Fed more cover to raise interest rates and hold them higher for longer as officials wait for the cumulative tightening from the past year to bring down inflation.
Tuesday’s remarks are Powell’s first since Friday’s jobs report.
This is breaking news. Read a preview of Powell’s speech below and check back for more analysis soon.
Federal Reserve chair Jerome Powell is set to deliver remarks Tuesday, following an interest-rate increase followed by a blowout jobs number last week.
Powell will speak with Carlyle Group co-founder and chairman David Rubenstein at the Economic Club of Washington, D.C. on Tuesday. The event begins at 12 p.m. ET.
Stocks surged after the Federal Open Market Committee increased the federal funds rate by 0.25 of a percentage point to a target range of 4.50% to 4.75% on Wednesday. In his post-meeting press conference, Powell pointed to the recent softening in goods and housing inflation, commenting that “the disinflationary process has started.”
Powell’s comments led the futures market to price in a lower peak fed-funds rate of around 5% and greater odds of cuts in the second half of 2023. The S&P 500 SPX –0.32% jumped 2.5% on Wednesday and Thursday, while the Nasdaq Composite COMP –0.17% surged more than 5%. Bond yields slid.
Then came the January employment report on Friday morning. Hiring surged last month: The U.S. economy added a seasonally adjusted 517,000 nonfarm payrolls, more than doubling the job growth expected by economists. Upward revisions to November and December hiring totaled another 71,000 jobs. The unemployment rate at 3.4% matched a nearly five-decade low and job openings data earlier last week showed an increase in unfilled positions.
Get WSJ Print Subscription for $318
The data show the U.S. labor market remains tight, giving the Fed more cover to raise interest rates and hold them higher for longer as officials wait for the cumulative tightening from the past year to bring down inflation.
Many commentators said that Powell could deliver a more hawkish tone on Tuesday to walk back some of the more dovish remarks from last week. The S&P 500 is down 2% in the two days following the January jobs report on Friday, while the Nasdaq had slid nearly 3%. Futures moved to price in an additional quarter point of rate hikes this year and bond yields crept higher.
“If Powell reruns his December playbook and focuses on the need for economic ‘pain,’ markets will price in an FOMC reaction function that is less sensitive to signs the economy is weakening,” wrote 22V Research’s Dennis DeBusschere on Tuesday morning. “The bar for cuts will be higher than previously thought. That means a Fed funds rate that is restrictive until pain happens.”
That kind of language from Powell could prompt a short-term reversal of some of the year-to-date rally, which has been led by areas of the market that are most sensitive to changes in interest rates. But the stock and bond markets’ moves of the past few days have already been in that direction, possibly tempering the reaction to more hawkish comments from Powell on Tuesday.
On the other hand, if Powell dismisses the Friday jobs report as simply volatility in the data—but still part of an overall trend toward the Fed’s economic goals—then the rally may resume.
There was one sign of progress in Friday’s report: January’s average hourly wages were up 0.3% from the prior month and up 4.4% year over year, slower than the 4.8% increase through December. That’s well above the Fed’s 2% annual inflation target, but a sign that wage growth can slow without widespread job losses.
If Powell focuses on a path to bring down services inflation while avoiding a recession, it will be interpreted as further dovishness from the chair.
“We’d be surprised if he doesn’t again highlight the positives the Fed has seemingly accomplished—creating the beginnings of a disinflation without so far disrupting the hiring process,” wrote Macquarie currencies and interest rate strategist Thierry Wizman on Tuesday. “That’s a win, so far. Emphasis on that could give risk-taking a boost” declared to Barrons Digital News.
