The latest US jobs report was pretty surprising. Economists were expecting a healthy increase of about 200,000 in January, but non-farm payrolls more than doubled to 517,000. This came against a backdrop of massive tech layoffs by companies including Google and Microsoft, investor expectations of subdued inflation and an impending recession slowing the economy. By the end of Friday, a smiling Joe Biden was saying that his economic plan to increase the number of jobs in America while fighting inflation was working. And as of this Monday, his Treasury Secretary Janet Yellen was indicating that half a million jobs and the lowest unemployment in 50 years do not indicate an imminent recession.
But there’s a problem with all this good news: The Federal Reserve doesn’t want that much job growth. The jobs increase was a key reason cited by the Fed last month as it raised interest rates in hopes of reining in inflation, while markets braced for slower inflation and a mild (or worse) recession. Surveying the landscape, Goldman Sachs sees one big change for the coming year.
The market had priced in an interest rate cut by the end of this year ahead of Friday’s report. Jan Hatzius, chief economist at Goldman Sachs, believes the January jobs report means the Fed is no longer likely to lower interest rates until 2024, and that means markets will have to reevaluate a lot.
“We think we’ll get some more increases that will take you into the low-5 instead of the high-4,” Hatzius reported. of cnbc Squawk on the Street on Friday referring to the inflation rate, which currently stands at 6.5% against the Fed’s target rate of 2%. “More importantly, we do not expect a funds rate cut until 2024 in our baseline forecasts.”
“The economy is still pretty strong, the labor market is certainly still very strong. And while inflation is coming down, even if we get to 3% by the end of this year and 2.5% by 2024, it’s still well short of the target. This could lead to the Fed continuing to hike or keep rates on hold, rather than bring them down, as financial markets expect.
He cautioned that “outlier numbers” like the January jobs data need to be taken with a grain of salt because of the difficulty in seasonal adjustments during the month. Huttius noted that while the general consensus of most economists is that the economy is headed for a recession, he sees “no sign of it” in light of the jobs report and other indicators such as the non-manufacturing ISM survey. “Clearly, the economy is doing much better than many forecasters and, in fact, the forecasters’ consensus is saying.”
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