Fed's Powell says job strength shows inflation fight may last 'quite a bit of time'

The nonfarm payrolls report for January, which was published on Friday, was certainly stronger than anyone I know expected, he said

Federal Reserve Chair Jerome Powell said on Tuesday the latest US employment report showed the process for getting inflation back near the central bank's 2% target will take "quite a bit of time" even though there are indications cost pressures are ebbing, at least for goods.

The nonfarm payrolls report for January, which was published on Friday, was "certainly stronger than anyone I know expected," Powell said during a question-and-answer session at the Economic Club of Washington.

"We didn't expect it to be this strong," Powell said, but it "shows why we think this will be a process that takes quite a bit of time."

At the same time, Powell declined to equate the surprising strength in the job market shown in the January employment report with an expectation that interest rates would need to be higher than Fed officials estimated late last year.

In December, the median estimate among members of the Federal Open Market Committee was for the Fed's policy rate to climb just above 5% this year, a level that financial markets had been reluctant to buy into until last Friday's jobs report.

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Powell's remarks offered some indication of how he and other policymakers have begun to take stock of an unexpectedly strong jobs market that they had been expecting to weaken as the Fed's rate hikes slow the economy in order to take the wind out of inflation. He was not the first to express surprise at January's level of job creation.

"I think it surprised all of us," Minneapolis Fed President Neel Kashkari said in an interview broadcast on CNBC earlier on Tuesday, referring to the blowout jobs report last Friday in which the US government reported a gain of more than half a million jobs for January.

The numbers were far out of line with the looser labor market the Fed has expected and feels will be needed to ensure that wage growth also slows and inflation, which is still running at more than double the central bank target, continues to fall.

Kashkari, who has been more aggressive than almost all his colleagues in his assessment of how high interest rates need to go, had said a month ago that he forecast the central bank's policy rate should rise to 5.4%. The jobs report consolidated that view.

"It tells me that so far, we're not seeing much of an imprint ... on the labor market," Kashkari said. "It's pretty muted so far, so I haven't seen anything yet to lower my rate path."

Kashkari and a handful of other Fed officials since Friday have signaled an openness to pushing the benchmark overnight interest rate above the 5.00%-5.25% range forecast by Fed policymakers in December.

After last week's policy meeting, when the Fed lifted its policy rate by a quarter of a percentage point to the 4.50%-4.75% range, Powell in his repeated references to welcome signs of emerging "disinflation" left investors with the impression he might be open to stopping short on the December rate forecast.

Friday's data, highlighted by the upside surprise on job creation and a drop in the unemployment rate to its lowest level since 1969, has prompted an abrupt reassessment in financial markets. Bond yields have rocketed higher and interest rate futures markets now are squarely priced for a federal funds rate reaching at least 5.1%.

Labor market concerns

On Monday, Atlanta Fed President Raphael Bostic was one of those who said the central bank may need to lift borrowing costs higher than previously anticipated given the job gains. He noted that while a half-percentage-point rate hike was not his base case for the next policy meeting in March, it could be considered.

"It'll probably mean we have to do a little more work," Bostic told Bloomberg News. "And I would expect that that would translate into us raising interest rates more than I have projected right now." Bostic had previously forecast that the federal funds rate would top out in the 5.00%-5.25% range, like almost all his colleagues.

In his interview, Kashkari also pointed to other concerns that emanated from such a strong labor market, including an extremely robust services sector and fast growth in wages that was still not consistent with the Fed's inflation target, at a time when the central bank's steepest rate hiking cycle in 40 years is supposed to be sapping demand from the economy.

"It's hard to imagine that you're going to see very strong job growth while wage growth is moderating and that's what I'm looking for," Kashkari said. "We've seen no progress so far, virtually no progress in core services ex housing, and that's very tied to the labor market."