Strong January Jobs Report Means Fed Raises Rates Higher Than Forecast, Says Atlanta Fed Chief

President of the Federal Reserve Bank of Atlanta Raphael W. Bostic speaks at a European Financial Forum event in Dublin, Ireland, on Feb. 13, 2019. (Clodagh Kilcoyne/Reuters)

It appears that the stronger-than-expected U.S. jobs report last week likely means that the Federal Reserve may be open to raising the interest rate higher than planned, said a member of the Fed board.

Federal Reserve Bank of Atlanta president Raphael Bostic, in an exclusive interview with Bloomberg News on Jan. 6, said that the results from January’s strong jobs report raises the possibility that central bank policymakers of the Federal Open Market Committee (FOMC) could hike borrowing rates a bit higher next time than they had previously intended.

If the U.S. economy continues to grow at its current pace, “It’ll probably mean we have to do a little more work,” Bostic told Bloomberg.

“And I would expect that that would translate into us raising interest rates more than I have projected right now.”

The Atlanta Fed chief repeated his stance, in line with the Fed’s December forecasts, that interest rates will be raised to 5.1 percent this year as planned and will be kept at that level through 2024, before they are reduced.

The benchmark rate is currently at a range of 4.50–4.75 percent since the rate hikes on Feb. 1.

Fed Policymakers May Consider Ramping Up Future Rate Hikes

The FOMC may raise the interest rate by an additional quarter point to keep up with growth, over the two currently planned hikes, after policymakers lowered the pace to 25 basis points in February, which Bostic supported.

The rate hike was lowered last month after a 50 basis-point increase in December and four 75 basis-point hikes over the previous months.

Alternatively, the Fed could push for a higher peak rate via through a quarter-point hike in addition to the two planned later this year, while not ruling out a potential 50 point increase, said Bostic.

“It wouldn’t surprise me if we saw this quarter or the next come in stronger than people expect right now,” said Bostic.

He said that he is focused on “imbalances between supply and demand,” since too much demand can lead to higher inflation.

Bostic does not expect the FOMC to move back to a 50 basis-point hike, but he said they would do so if it was necessary.

January Jobs Report Comes in Too Strong for Fed

Investors have raised their peak rate projections this year and are closely aligned with Bostic’s estimates, following the results from the January jobs report.

Employers added 517,000 new jobs in January, while unemployment fell to 3.4 percent, the lowest record since May 1969.

The jobs report also showed average hourly earnings rising by 0.3 percent last month from December and up 4.4 percent from a year earlier.

Bostic, who is not voting on policy this year, said that policymakers are likely reviewing the January jobs report to see if it was an “anomalous reading” and would be “inclined to look through this a bit,” if it were the case.

“Job one for us has got to be to get inflation back under control,” he told Bloomberg, “and I’m going to do all I can to see that we do that.”

Fed Chairman Jerome Powell told reporters last week after the Fed’s policy meeting that his colleagues planned to deliver a “couple” more interest-rate hikes before freezing their aggressive campaign to fight high inflation.

Bostic seems to agree with Powell’s stance, saying that the committee could choose to hike rates further if necessary after a short pause.

The Fed is attempting to slow wage gains in order to reach its inflation target of 2 percent.

Fed Needs Weaker Jobs Market to Lower Inflation

Powell said that a hawkish policy in a tight labor market was needed to cool continuing price pressures and noted a ratio of 1.9 job openings for every unemployed worker.

The Fed chief will speak again for the first time since the release of last week’s jobs report, which came after the latest rate increase, on Feb. 8 in Washington.

Fed officials have stated that their primary goal is to reduce U.S. economic growth, including the job market, to push price pressures close to the same levels that existed prior to the pandemic.

Despite the strong jobs report, the Atlanta Fed chief said the strong payroll figures increased the likelihood of a soft landing of the American economy.

“I’ve said for a long time that I thought there’s a lot of momentum in the economy and that there was a good chance that that momentum was going to be sufficient to absorb our policy tightening in ways that could help us avoid a recession,” Bostic told Bloomberg.

Regarding future Fed policy, “I like optionality, so I never want to foreclose any action, but I do think that a lot of this will depend on how the economy evolves relative to my expectations,” Bostic said.

“We understand what data dependence means, and we’re going to try to avoid getting too locked in to just one approach.”

He expected inflation to fall to the “low 3s” this year, which is still well above the Fed’s 2 percent target, which will likely require interest rates to be higher for longer.

“Those last few tenths of a point can take a long time to be realized,” Bostic added.

“And so I want to make sure that we are in the right place before we start easing off our policy, because the most important thing at this stage is to get our price stability measure as close to target as possible,” he said.