Bigger-than-expected US job gains last month are fueling market bets that the Federal Reserve will kick off its interest rate hikes in March with a hefty half-point jump.
That’s likely a bridge too far, given what Fed policymakers have said, where the jobs market is now, and what history suggests. But they do cement expectations that the Fed will raise rates at most of its remaining seven meetings this year as it moves to battle high inflation without undermining the labor market recovery.
Interest-rate futures traders largely expect Fed policymakers to raise the target range of the overnight borrowing rate between banks by a quarter-of-a-percentage point, to 0.25 percent-0.50 percent. But they are also pricing in a 31 percent chance of a bigger, half-point rate hike
That’s up from about a 13 percent chance priced in before the US Bureau of Labor Statistics reported employers added 467,000 jobs in January. The job gains surpassed even the most optimistic of economist estimates in a Reuters poll; most had expected that the surge in COVID-19 cases would dent demand for workers.
But the report suggested the opposite, as average hourly wages rose 5.7 percent from a year earlier, and the number of people employed or looking for work increased, a metric closely watched as a sign of labor market health. There are still 2.8 million fewer jobs than before the pandemic hit the US economy in March 2020, but the jobs gap is narrowing steadily.
Since the 1990s, when the Fed is considered to have largely tamed inflation, 50 basis-point hikes have been the exception and have never been used to start a tightening cycle.
To St. Louis Federal Reserve President James Bullard, one of the Fed’s most strident supporters of earlier and faster policy tightening, it wasn’t clear what starting with a bigger bang would accomplish.
Since late last year markets have been tightening financial market conditions on their own, anticipating Fed actions that have not been taken yet. The yield on the benchmark 10-year Treasury note rose Friday to 1.9 percent, the highest it’s been in over two years.
At this point “It is not clear what you are buying with a 50 basis point move,” Bullard told Reuters Tuesday. “In a way we have done a lot of the work already and I am not sure it behooves us to do a dramatic funds rate increase” in March.
