By Lindsay Dunsmuir and Howard Schneider
(Reuters) -Federal Reserve policymakers have begun to take stock of an unexpectedly strong January jobs report, with Fed Chair Jerome Powell to face questions later on Tuesday on whether it has shaken his confidence that high inflation will come down without harsher steps by the U.S. central bank to slow the economy.
“I think it surprised all of us,” Minneapolis Fed President Neel Kashkari said in an interview with broadcaster CNBC on Tuesday, referring to the blowout jobs report last Friday in which more than half a million employment gains were reported for January by the U.S. government.
The numbers were far out of line with the looser labor market the Fed has expected and feels will be needed to ensure that wage growth also slows and inflation continues to fall.
Powell is due to speak at 1240 EST (1740 GMT).
Kashkari, who has been more aggressive than almost all his colleagues in his assessment of how high interest rates need to go, had said a month ago that he forecast the policy rate should rise to 5.4%. The jobs report consolidated that view.
“It tells me that so far, we’re not seeing much of an imprint…on the labor market,” Kashkari said. “It’s pretty muted so far, so I haven’t seen anything yet to lower my rate path.”
On Monday, Atlanta Fed President Raphael Bostic said the central bank may need to lift borrowing costs higher than previously anticipated given the job gains and noted that while a half-a-percentage-point rate hike was not his base case for the next policy meeting, it could be considered.
“It’ll probably mean we have to do a little more work,” Bostic told Bloomberg News. “And I would expect that that would translate into us raising interest rates more than I have projected right now.”
Bostic had previously forecast rates topping out in the 5%-to-5.25% range, like almost all his colleagues.
The Fed raised its policy rate by a quarter-of-a-percentage-point to 4.5%-4.75% last week and Powell at that point reiterated those rate hike expectations as sufficiently restrictive in its fight against inflation, which is running at more than twice the Fed’s 2% goal.
The jobs report, however, upended investor expectations for an earlier pause after the economy added far more jobs than expected and the unemployment rate fell to 3.4%, the lowest reading since 1969, prompting questions on whether the central bank will likewise raise its assessment of the peak policy rate.
In his interview, Kashkari also pointed to other concerns that emanated from such a strong labor market, including a very robust services sector and wages still growing at a rate faster than consistent with the Fed’s inflation target, at a time when the Fed’s steepest rate hiking cycle in 40 years is supposed to be sapping demand from the economy.
“It’s hard to imagine that you’re going to see very strong job growth while wage growth is moderating and that’s what I’m looking for…” Kashkari said. “We’ve seen no progress so far, virtually no progress in core services ex housing, and that’s very tied to the labor market.”
(Reporting by Lindsay Dunsmuir; Editing by Andrew Heavens, Chizu Nomiyama and Andrea Ricci)
