It felt like only yesterday that investors were confident that a tougher Federal Reserve would raise its key interest rate by a half percentage point at its meeting in less than two weeks.
That’s because it happened yesterday. On Thursday, futures traders were almost convinced the Fed would adopt a more hawkish monetary policy stance and double the quarter-point increase approved last month.
Nevertheless, one bank failure and a cooperative jobs report later, the market changed its mind.
According to the CME Group, the chance of a 0.25 percentage point increase surged beyond 70% at one point during morning trade, indicating that a brief episode of Fed-induced panic had passed.
“Overall, the statistics do not indicate a 50 [basis point] rate hike by the Fed on March 22,” said Kathy Bostjancic, chief economist at Nationwide.
Nonfarm payrolls climbed by 311,000 in February, exceeding the Wall Street forecast of 225,000 but falling short of January’s 504,000.
Maybe more importantly, average hourly earnings increased by 0.24% for the month, for a 4.6% year-over-year increase that fell short of the 4.8% forecast. That’s an important statistic for the Fed, which will no doubt be monitoring Friday’s Labor Department report as intently as it will be studying consumer and producer prices in February next week.
“The Fed can take confidence in rising labor supply and lessening wage pressures to retain a 25 [basis point] rate increase,” Bostjancic noted. A basis point is equal to 0.01 percent.
Analysts at Bank of America and Goldman Sachs agreed, stating Friday morning that they are sticking to their projections for a quarter-point increase at the Federal Open Market Committee meeting on March 21-22. For their outlooks, both banks used the phrase “close call,” indicating that the upcoming week of data will play a significant impact in the Fed’s final decision.
Powell, the Fed’s chairman, will be on Capitol Hill this week, and he will have his hands full.
“The February data was overall on the milder side,” said Michael Gapen, Bank of America’s chief U.S. economist, in a client note. “Although payrolls exceeded our forecasts, the increase in the unemployment rate and relatively weak average hourly wages statistics suggest a little better balance between labor supply and demand.”
The drop to 25 basis points was remarkable because the view for a 50 basis point move was above 70% at one time Thursday, according to the CME’s FedWatch gauge of trade in federal funds futures contracts. This occurred after Fed Chairman Jerome Powell told Congress this week that if inflation readings did not improve, the central bank would likely raise rates faster and higher than previously forecast.
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Nevertheless, that price began to come in during a severe drop in the stock market and concerns that the failure of Silicon Valley Bank could be indicative of financial sector contagion. Though trade was erratic and the half-point move was gaining traction, the change toward the quarter-point possibility grew more obvious Friday morning.
“It was difficult to disentangle the move down on 50 basis point odds from the fall of SVB,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “It has to be on Fed’s mind: Is this the thing that’s breaking?”
