Last week at the Economic Club of Washington DC, Fed Chair Powell said the strong labor market will make bringing inflation down longer and will require higher interest rates than many have been expecting. The latest government data showed unexpected strength in the labor market. Not only were the January numbers great, but the revised numbers for the previous months showed the economy began the year with more momentum than previously thought. Tight labor markets, elevated wage pressures and high inflation in the service industry are keeping inflation high despite the series of interest rate increases.
The process of lowering inflation to the Fed’s 2 percent goal is “probably going to be bumpy”, and the expectation that “inflation will go away quickly and painlessly is not the base case.” The base case now is the future will hold more rate increases and then the Fed will consider whether they’ve gone far enough.
Fed officials have raised rates by 4.5 percentage points in the last 12 months, the fastest pace since the 1980’s, and are expecting the unemployment rate to rise to 4.6 percent (from the current 3.4 percent) by the end of the year. In December, the Fed thought rates would rise to 5.1 percent in 2023, but now more than a third of the officials are looking at 5.25 percent, implying rates will rise at the Fed’s March, May and June meetings.