Fed watching jobs report closely
Fed policymakers are watching the job data closely. The data give the Fed insight as to whether the US economy (SPY) (IVV) is strong enough to withstand interest rate hikes. The Fed hiked the rates four times in 2018. In the December meeting, the Fed signaled two more hikes in 2019. After softer economic data and the equity market sell-off, Fed Chair Jerome Powell acknowledged rising risks. At the beginning of January, he stated that the Fed can be more patient regarding the hikes in 2019. The market expects a maximum of one hike in 2019.
Inflation and interest rates
While the Fed has decided to be more patient with the hikes, its future path will still depend on economic data. The Fed has two main objectives—maximum employment and stable prices. One part of the equation is being taken off since the labor market remains strong. The other part is slightly trickier. Inflation pressures can flare up anytime due to tightness in the labor market. Since the unemployment rate remains at a multiyear low, employers are having a harder time attracting employees. The pressure on wages is expected to rise and stoke inflation (TIP). Higher inflation will likely need higher interest rates (IEF) to keep the rising prices under control. An unwise choice by the Fed could trigger a recession or lead to the economy overheating, which aren’t desirable outcomes for a healthy economy.
Jobs report and Fed
An upbeat report for January and upcoming months could put pressure on the Fed to reconsider the rate hikes. However, a downbeat report could keep the Fed off the interest rate hike path longer. A significant surprise to the upside in the jobs report could move the markets (VTI) significantly.