Inflation May Be Tracking Down But Will Likely Require More Pain

Economists’ eyes are fixed on the March jobs report being released on Friday with some hope of more signs that inflation is slowing. However, no matter what the results, chances are that there are still more interest rates ahead, according to a Federal Reserve insider.

One factor the Fed watches with special consideration is jobs—how many are created, how many open, how wages change. More jobs and higher wages they assume to be increased pressure on inflation because more people have more money to spend. That’s greater demand which should evoke higher prices. The Federal Reserve has made abundantly clear that until it saw enough signs in the economy to show that inflation was truly on the path to the institution’s 2% average goal, the pressure through high interest rates would remain.

Friday’s jobs numbers come on the heels of the February JOLTS government report. It showed the number of job openings to have decreased to 9.9 million by the end of that month, though, at 4.0 million, the number of quits “edged up,” as the Bureau of Labor Statistics put it.

“The labor market is starting to loosen as the number of job openings declined in most sectors,” said Jeffrey Roach, chief economist for LPL Financial, on Tuesday. “As the economy slows, firms will likely cut openings and workers will be less likely to quit in search of better hours and higher pay.”

“To be sure, job openings remain highly elevated, but February’s level is the first month below 10 million since May 2021 and suggests businesses are becoming more wary about additional headcount,” said an Oxford Economics emailed note.

“The Fed could consider pausing rate hikes at the next meeting but only if the upcoming employment report shows signs of material weakness and the March CPI report reveals lower inflation,” Roach added.

However, that is pretty unlikely according to Federal Reserve Bank of Cleveland President Loretta Mester, who gave a speech Tuesday evening to the Money Marketeers of New York University. She still sees upward pressure on wages and other factors that are not in keeping with the Fed’s ultimate inflation goal.

“In my modal projection, to put inflation on a sustained downward trajectory to 2 percent and to keep inflation expectations anchored, monetary policy moves somewhat further into restrictive territory this year, with the fed funds rate moving above 5 percent and the real fed funds rate staying in positive territory for some time,” she said.

Susan Collins, president of the Federal Reserve Bank of Boston, said in a speech at the March 30 39th Annual NABE Economic Policy Conference that she saw “the median federal funds rate path for 2023 in last week’s Summary of Economic Projections from Fed policymakers (the SEP) as reasonably balancing the risk of monetary policy not being restrictive enough to bring inflation down, and the risk that activity slows by more than needed to address elevated price pressures.”

The median projected federal funds rate was 5.1%. However, in the central tendency, which drops the highest and lowest three projections, the amount was the range of 5.1% to 5.6%. The current target rate range is 4.75% to 5.00%. One more 25-basis point increase, which still seems likely for May, would push it over that edge.