Powell at the plate

Fed Chair Jerome Powell was unusually explicit in his semi-annual Humphrey-Hawkins testimony to the House Committee on Financial Services this week, saying "With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month." The FOMC is scheduled to meet on March 15-16.

It's probably safe to assume that Powell had seen the February non-farm payrolls report before making that statement. The BLS reported this morning that the US economy added 678,000 jobs in February, far in excess of the markets' expectation of a 400,000 gain. While this pushed the unemployment rate down to a post-pandemic low of 3,8 percent, aggregate employment in the US remains more than 2 million below its pre-pandemic peak, as the effects of the so-called "Great Resignation" persist. 

With inflation at the consumer level already above 7 percent, it may be some consolation for the Fed -- though not for the average American worker -- that average hourly earnings scarcely budged in February.  The year-on-year increase of 5.1 percent means that average living standards are eroding even as the economy bounces back. 

The relatively sluggish rise in wages is evidence that the current surge in inflation is not comparable to past inflationary episodes. It is driven primarily by supply chain problems, which implies that any Fed move to raise rates will be aimed primarily at keeping inflation expectations in check, rather than directly attacking the underlying causes of inflation in the short term.

The big wild card for the Fed is, of course, the Russian invasion of Ukraine. This has already pushed gasoline prices, always a hot-button issue in the US, to levels not seen since 2005. The surge in that year was the result of Hurricane Katrina, which could reliably be expected to have only a transitory impact, as indeed it did. There is no such reassurance now, and thus Powell's continued confidence that inflation will start to head lower this year might be said to be based more on hope than expectation -- or econometrics.  Inflation at more than three times the target rate calls for multiple rate hikes in short order. A hot war in Europe, not so much.