Calling It a Win

Investment Insights: Market Update
  • As expected the Fed last week raised its key overnight rate by 25 basis points to a range of 4.50 percent to 4.75 percent.
  • Shares faltered in recent days after a red-hot jobs report on Friday raised concerns that the Fed could pivot yet again to a more hawkish stance.
  • The US economy added 517,000 jobs in January, almost three times higher than expectations.
  • Fed officials expect two more hikes before pausing their program, but it may not be that cut and dry.

Shares climbed markedly higher in the first few weeks of the year, but have faltered in recent days as the Federal Reserve's outlook became hazy. On cue last week, the Fed raised its key overnight rate—the federal funds rate—by 25 basis points to a range of 4.50 percent to 4.75 percent. The move came like clockwork and was widely expected by the market over a larger hike after data showed inflation slowed to a rate of 6.5 percent in December. Officials seem confident that their actions to combat rising consumer prices are working, with Fed Chair Jerome Powell proclaiming, "the disinflationary process has begun."

However, while the Fed was raising rates and claiming victory, the real story was unfolding. On Friday, the US Bureau of Labor Statistics released its all-important jobs report, and the results surprised many. The US economy in January added a whopping 517,000 jobs, reflecting accelerating labor market growth and bringing the US unemployment figure down to 3.4 percent—a 50-year low. The release was almost three times higher than estimates—a more "normal" figure for monthly job gains is around the 200,000 mark.

While this represents a strong positive for workers, it is the opposite of what the Fed is looking for. Monetary policy and the labor market have a strong relationship. Typically, restrictive policy eventually leads to higher unemployment with slower wage growth and—the main goal—lower inflation. It's important to note that this is a single data point, and there have been more than a handful of stellar jobs numbers in the post-pandemic era. Going forward, Fed officials will be watching labor market data closely, particularly if the trend continues and enough momentum builds up to push wages—and inflation—higher.

Investors are scrutinizing the so-called "Fedspeak" to see if officials pivot yet again to a more hawkish stance. For now, it seems that central bankers are holding steady with their guidance for two more hikes before pausing. The markets agree. Futures data reflect investors betting on one 25 basis point hike at the Fed's meeting in March and another in May—reaching its target rate of about 5.0 percent. It's unlikely that things will end up so cut and dry. There are still opportunities for the labor market and inflation to surprise to the upside. If that happens amid a tangible slowdown in other parts of the economy, the Fed could have a real problem on its hands.

Market Dashboard

Financial market data for various time periods covering global asset classes. Data as of February 7, 2023.

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[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
Chief Investment Adviser