January's jobs report just threw cold water on hopes for a dovish Fed

  • The Federal Reserve signalled this week that the end of rate hikes for this cycle could be near.
  • But after an unexpectedly robust jobs report Friday, some are reversing expectations.
  • The recently ended government shutdown – and potential for another one – has muddled the outlook at an already uncertain time for the economy.

The latest snapshot of the US labour market could upend newfound expectations for the Federal Reserve to take a break on raising borrowing costs.

Fed Chairman Jerome Powell said this week the case for raising interest rates had weakened and that he didn’t know which direction the next adjustment would go, citing several strains that have emerged since the Federal Open Market Committee last hiked in December.

But after the economy capped its 100th straight month of steady job gains, some are less convinced that a string of hikes could be coming to an end. On Friday, the Bureau of Labour Statistics said the US added significantly more nonfarm payrolls than expected in January and that wages ticked higher.

“I’d say it was something of a curve ball in light of the most recent FOMC statement!” Ken Kuttner, a former staff economist at the Fed, said in an email. “If we saw another couple of employment reports like that, I’d expect some backing off from the ‘patient’ language for sure.”

After weeks of increased focus on financial-market turbulence, ongoing trade tensions, and dimming expectations for global growth, Fed officials dropped a reference to “further gradual increases” in their statement Wednesday. Two more rate hikes had previously been penciled in for the year.

The recent partial government shutdown had introduced additional concern, with recent estimates from the Congressional Budget Office suggesting the five-week closure cost the economy billions. While Powell said there are lingering questions about the extent of its impact, he thinks economy should mostly recover.

“As the shutdown fades into the past and if another one doesn’t do more damage, the Fed will lose one of its arguments for pausing,” said Josh Wright, chief economist at iCIMS. “This report could undermine the narrative at the Wednesday FOMC, and the newly dovish Fed may have to reverse course before long.”

But the government is funded through February 15, putting about a fourth of cabinet-level agencies at risk of another closure. If President Donald Trump and lawmakers can’t forge a compromise on border security before then, another partial shutdown will begin.

That is adding yet another layer of uncertainty for FOMC officials already facing conflicting economic signals, according to Columbia University political scientist Gregory Wawro. He said the “atypical turmoil” in Washington likely contributed to Wednesday’s more cautious tone.

“With the release of some very troubling estimates of the cost of the shutdown to the economy, it makes sense to take a pause in the trend of rate increases to perhaps prevent the shock of the shutdown from slowing growth enough that it could lead the country into recession,” he said.

“The jobs numbers out today indicate the economy is still robust and I would bet if the economy continues its streak of monthly job increases, the Fed will resume raising rates next time it meets.”

Trump, who has hailed himself ‘the greatest jobs president that God ever created,’ cheered the BLS report in a tweetFriday. Reached for comment about the possibility that it could lead to rising interest rates, which the president has repeatedly lashed out about since taking office, the White House did not immediately respond.

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