Fed mulls bigger rate hikes to cool US economy

WASHINGTON - The United States is prepared to speed up interest rate hikes –- and could raise them higher than anticipated -- if needed to cool inflation and a strong jobs market, Federal Reserve Chair Jerome Powell said.

An "unseasonably warm" January across much of the country was likely behind the robust employment, consumer spending, manufacturing and inflation figures, which pointed to a partial reversal of earlier softening trends, Powell told the Senate Banking Committee. 

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," he said.

He added that the "ultimate level of interest rates" is likely to be higher than previously anticipated as well.

Stocks fell sharply following Powell's comments, with the Dow Jones Industrial Average closing 1.7 percent lower.

The dollar strengthened sharply against the euro and other major currencies, while the two-year US Treasury yield surged above five percent. 

Chance of bigger hike 

The US central bank has already raised its benchmark lending rate 8 times since early last year, as it contends with inflation that remains stubbornly above its long-term target of two percent.

It raised rates last month by a quarter percentage point to 4.50-4.75 percent, its highest level since the global financial crisis.

Powell's comments raise the likelihood of the Fed lifting rates by 50 basis points at its next meeting this month, Evercore ISI economists Krishna Guha and Peter Williams wrote in a note to investors.

"We must accept that this option appears to be somewhat more live than we had previously believed," they said, though adding that a quarter-point hike was still the more likely option.

Markets are now roughly evenly split on the chances of a larger half-point rate hike, said Joe Manimbo, senior market analyst at Convera.

Despite its forceful moves, the Fed's favored inflation measure, the personal consumption expenditures (PCE) price index, rose slightly to reach an annual rate of 5.4 percent in January.

Core PCE inflation, which excludes volatile energy and food prices, also rose 4.7 percent.

At the same time, the labor market remains "extremely tight," with close to two jobs available for every one unemployed person in December, Powell said.

US job creation surged in January, with employers creating more half a million new jobs and driving the unemployment rate to its lowest level since the 1960s.

A strong labor market supports incomes and, in turn, demand.

"To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions," Powell said.

Debt ceiling pressure

At Tuesday's hearing, Powell also faced questions about ongoing negotiations between the Biden administration and Republicans in Congress over raising the debt ceiling.

"Whatever else may happen Congress really needs to raise the debt ceiling," Powell said, adding to calls for the two sides to come to an agreement.

The United States hit its $31.4 trillion borrowing cap in January, kicking off frantic talks between Congress and the White House to raise the limit and allow the US to meet pre-existing spending commitments. 

Republicans in Congress have asked for spending cuts in exchange for their support, while the Biden administration has said it wants to separate any talks over the upcoming budget from the debt limit vote.

The nonpartisan Congressional Budget Office warned last month that the country risks defaulting on its debt as soon as July if an agreement is not reached. 

Powell's appearance comes shortly after the US central bank released a semiannual report on monetary policy, which pointed to a tight labor market, robust job gains, historically low unemployment and elevated nominal wage growth.

"The process of getting inflation back down to two percent has a long way to go and is likely to be bumpy," Powell said. "We will stay the course until the job is done."

Agence France-Presse

Unemployment claims in US show layoffs continue to batter economy

More than five months after the coronavirus pandemic began throttling the economy, layoffs remain widespread, the U.S. government reported Thursday, the latest sign of the labor market’s painstakingly slow recovery.

Last week, 833,000 workers filed new claims for state unemployment benefits, while 759,000 new claims were filed by freelancers, part-time workers and others under a federal program called Pandemic Unemployment Assistance. Both figures, which are not seasonally adjusted, were increases from the previous week.

“It’s pretty bad at this stage in the crisis,” said Gregory Daco, chief U.S. economist at the forecasting firm Oxford Economics. “I feel like this is a very fragile labor market at a critical juncture.”

There has been progress from the early days of the pandemic, when weekly tallies of new claims surged past 6 million. But recent improvements have been more arduous.

Of the 22 million jobs lost in March and April, more than 9 million have been regained. And most analysts expect that the monthly jobs report, scheduled for release Friday, will show a dip in August from double-digit unemployment rates.

But the damage to the economy has been wide and deep. As of mid-August, more than 29 million Americans were receiving some sort of unemployment insurance.

The report Thursday was the first to be affected by a change in the way the Labor Department accounts for predictable seasonal patterns, like temporary holiday workers who are laid off in January.

The seasonally adjusted figure for the week was 881,000. The number looks much lower than the previous week’s adjusted figure of just over 1 million, but the drop can be attributed to the altered methodology. Because the change means seasonally adjusted numbers cannot be compared with those tallied until now, The Times is emphasizing the unadjusted figures.

The unadjusted number of 833,000 last week was an increase from 826,000 the week before.

Daco said he was particularly concerned about the increase last week in new claims for Pandemic Unemployment Assistance, the program for those generally ineligible for state jobless benefits. The total of 759,000 was up from 608,000 a week earlier.

“It could reflect a weakening economy in some of the states worst impacted by the health crisis,” he said, “or it could be that some of the workers that had returned are finding that it’s not possible or sustainable to return to their primary economic activity in the current environment.”

Help wanted, depending on the industry.

Some businesses are hiring. Postings at the job search site Indeed rose slightly last week, although the total is still more than 20% below what it was this time last year.

The hospitality, tourism, and sports and fitness sectors are in the worst shape, with postings down more than 40% from where they were a year ago. Listings for higher-wage jobs in banking, finance and software development are also much more scarce.

Construction, driving and warehouse jobs seem to be the most plentiful.

The job site ZipRecruiter has seen a gradual increase in job listings over the past couple of months, but the pace of growth began to slow in mid-August, said Julia Pollak, the company’s economist.

Consumers pulled back on spending after a $600 weekly jobless benefit supplement ceased in July. At the same time, many small businesses are running out of the money they received through the federal Paycheck Protection Program.

A recent survey from the National Federation of Independent Business found that 1 out of 5 small-business owners said they would have to shut down if economic conditions did not improve in the next six months.

Congressional negotiations on a new relief package remain at a standstill.

The Labor Department report provided no fundamental change in the jobs picture that would resolve the stalemate between Republicans and Democrats in Congress over a new economic relief package.

With the end of the $600-a-week jobless benefit supplement, most states are moving ahead with plans to provide unemployed workers with a temporary replacement: a weekly $300 supplement paid out of federal disaster relief funds.

As of Wednesday, 45 states had applied for a grant from the Federal Emergency Management Agency. Six of those — Arizona, Louisiana, Missouri, Montana, Tennessee and Texas — have started paying out benefits, according to the Labor Department, but a vast majority have not.

Most will probably not be able to gear up to start payments until mid-September or later. The supplement is expected to last four or five weeks.

South Dakota is the only state that has confirmed it is not taking part. Gov. Kristi Noem says her state doesn’t need the money.

A handful of states, including Kentucky, Montana and West Virginia, have plans to boost the supplement with an additional $100.

-Patricia Cohen and Gillian Friedman, The New York Times-