Fed seen on shallower rate path as wage gains cool

THE Federal Reserve may have less reason to raise interest rates as sharply or as high as earlier thought after a government report on Friday (Mar 10) rekindled hopes of easing inflation amid signs the pandemic-disrupted labour market is normalising.

The US unemployment rate ticked up to 3.6 per cent in February as more workers entered the labour force, and wage gains slowed to 0.2 per cent from 0.3 per cent in January, the Labor Department’s report showed.

Though the month’s payroll gains of 311,000 exceeded expectations, hiring was concentrated in a narrower range of industries, a sign some economists pointed to as suggesting what has been an extremely tight labour market is set to ease.

That could set the stage for slower growth, lessening price pressures ahead and reducing the need for the Fed to return to the aggressive rate hikes it used last year to rapidly reach a more restrictive monetary policy setting.

“This report screams soft landing and looks to be a pretty good one for the Fed,” said Omair Sharif of Inflation Insights. “In the current environment, this is basically what the Fed is hoping to see.”

After the report, futures tied to the Fed policy rate pointed to a quarter-point rate hike as the most likely outcome of the central bank’s meeting this month. Just 24 hours ago a half-point rate hike was seen as the far more likely result.

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Traders also slashed expectations for the Fed to ultimately raise rates any higher than 5.5 per cent. The current target range is 4.50 per cent-4.75 per cent.

Friday’s report is among key pieces of data that Fed chair Jerome Powell and his fellow monetary policymakers are tallying in the run-up to their Mar 21-22 policy-setting meeting in Washington.

Hotter-than-expected reads on the job market and inflation in January already had some US central bankers thinking they may need to drive rates above the 5.1 per cent they had projected in December.

And analysts said that the jury is still out on whether the “totality” of the data that Powell and colleagues are focused on will move the Fed to ramp up its rate hikes after all. Next week the Bureau of Labor Statistics will provide a fresh read on inflation with the publication of the consumer price index.

“The Fed can take comfort in the rise in the supply of labour and the easing of upward pressure on wages to maintain a 25 basis point rate increase,” Nationwide chief economist Kathy Bostjancic said. “However, the February CPI report will also weigh heavily in the Fed’s deliberations of whether to raise rates 25bps or 50bps. Another rapid rise in consumer inflation could tip the scales towards 50bps.” REUTERS