It now looks like Fed rate hikes may be easier said than done
During the week, the Fed testimony by Jerome Powell was the big global event. Clearly, there were the likes of Bullard in the committee veering towards early rate hikes while Neil Kashkari and others were veering towards a longer spell of low rates and ample liquidity. Powell now appears to veer towards the latter group. At least that appears to be the tone of the Fed from the testimony.
Focus shifts to labor data
Among the various points made by the Fed chair in his testimony, the one point that stood out was the increasing focus on jobs data. Powell has now affirmed that irrespective of what the inflation data and the GDP growth data showed, the focus would largely be on the jobs data. The jobless rate had touched the high point of 15% last year but it is now down to around 5.6%. However, Powell has clarified that would be keen to see the jobless rate down at 4.5% first.
What is so special about the 4.5% rate for joblessness. That is the rate that the Fed and the US government defines as full employment. The argument put out by Powell was that the sharp fall in growth had been the most unfair to the most vulnerable sections of American society. He pointed out that even the recovery was skewed in favor of the more privileged classes. Jobless rate of 4.5% would naturally imply that weaker sections were also taken care of. Hence that would now be a basic condition.
Not just GDP and inflation
In a way, the tone of the Fed had been that rate hikes would certainly happen in two tranches by 2023. That would have pre-supposed an earlier taper and which spooked markets. Clearly, Powell was trying to downplay the risk to markets by making jobs data the pre- condition to any rate hike decision. In a way he is right that GDP data is too macro and does not measure whether the people at large are better off or not. Secondly, inflation is still driven by the supply chain constraints and members including Neil Kashkari have downplayed the importance of inflation as a sign of heating up of the economy. What does all this mean for the trajectory of rates?
Rate hikes will not be easy
Experts are of the view that while GDP and inflation will make a quicker case for a rate hike, jobs data may be more complicated. Jobless claims have been rather volatile and moving from 5.6% to 4.5% on the jobless scale will be much harder than anticipated. There is one more aspect to this Fed testimony by Jerome Powell. The US got the flak for creating the global market disruption in 2015 by unilaterally going ahead with rate hikes. In the post-COVID scenario, Powell may not want the Fed exposed to that kind of risk. This time around, the rate hikes by the Fed will be better deliberated, more consensual and even likely to err on the side of caution!