Strength in employment tempers hopes of a Fed pivot

The official January jobs report showed the non-farm payroll increased by 517,000 jobs, well above consensus expectations of 190,000. In addition, the unemployment rate stood at 3.4%, the lowest since the late 1960s, while average weekly hours worked jumped from 34.4 to 34.7 in December. Finally, the JOLTS (job openings) also surprised to the upside, rising to 11 million in December (vs. +10.4 million in November) and jobless claims that remain low, despite recent announcements of layoffs by significant companies.

In this context, the hopes of a change of direction in the Fed’s policy have started to lose strength since the Central Bank cleared that it wants to see a better balance between supply and demand. In his press conference following the February FOMC meeting, Fed Chairman Jerome Powell described the labor market situation as extremely tight. Therefore, it will be necessary to have more evidence that this balance is being reached (debe ser has been) before considering stopping the rise in interest rates.

Reaffirming the previous idea, Jerome Powell expressed again before the Economic Club of Washington that if the job market reports remain strong or if there is a possible acceleration of inflation (referring to this point, he positively highlighted that there is a notorious reduction), “it may well be the case that more needs to be done and rates increased more than the market has anticipated.”

The Fed will exhaust all its options to bring inflation to its long-term target of 2%. However, futures for the federal funds rate continue to reflect that the peak will be reached in June, with a rate of 5% (in line with the view that was held before the end of 2022), which may be maintained, depending on economic conditions.

Unemployed workers and vacancies (figures in millions)

Source: UBS

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