CHAPEL HILL – The U.S. job market continues to outperform expectations despite stubborn inflation and aggressive rate hikes from the Federal Reserve. But will the Fed explore more rate hikes to slow red-hot labor market? Is a recession still on the way?
Yes to both questions, according to economists at UNC-Chapel Hill.
The February jobs report numbers released today revealed that over 300,000 new jobs were created last month, causing Dr. Greg Brown, Executive Director of the Kenan Institute of Private Enterprise at UNC Kenan-Flagler Business School, to declare it as “another really strong number by historical standards.”
Brown shared his reaction earlier this morning during a virtual economic briefing hosted by The Frank Hawkins Kenan Institute of Private Enterprise.
Screenshot of a Kenan Institute slide, presented virtually via Zoom on March 10, 2023
Positive Jobs Numbers and Interest Rate Hikes
The positive jobs report comes with concerns that the Federal Reserve may react and try to slow down the economy through interest rate hikes.
US adds 311,000 jobs in February – that could mean more interest rate hikes
However, Brown noted that the bond market “actually liked” today’s news.
Brown said that any positive market reaction is a reaction to positive labor force numbers. The report showed about 400,000 people entering the labor force in February and an increase in the unemployment rate due to new entrants, an uptick from 3.4 percent to 3.6 percent.
One one hand, the positive labor force participation may encourage a less aggressive Fed response. As Brown put it, “This is going to be the solution that gets the Fed out of its current bind.”
Screenshot of a Kenan Institute slide, presented virtually via Zoom on March 10, 2023
“If you look at the market reaction to it, it might be opposite what you’d expect from a really strong number,” said Brown. “You might think like, ‘Oh, this is going to increase the concern about the Fed getting more aggressive, causing the economy to tip into a deeper recession if they have to really kind of be much more aggressive.’ But the bond market actually liked it. And consequently, the stock market liked it too.”
Brown said that positive labor force participation numbers are “the Goldilocks scenario that markets are hoping for.”
“We start to see labor forces return to pre-COVID participation rates, maybe even start to tick up some to the rates that we saw over the last previous 20 years or so,” said Brown. “So I think that’s what the positive reaction has been.”
Positive labor force participation could encourage the Fed to be less aggressive with interest rate hikes, which could mean a potential “soft-landing scenario” for the economy.
“If we define a ‘soft landing’ as the economy kind of coming back into equilibrium without hitting a recession, really the only good way to get there is to have more people enter the labor force,” said Brown.
But Brown believes that the Fed will continue to increase rates despite today’s positive reports about labor participation.
“While there may be some martial good news in terms of what’s happening to wages and labor force growth in the current report, the Fed is still in a place where it’s likely going to have to be more aggressive,” said Brown.
Still Predicting a Recession
Brown said the risk is “to the upside on Fed tightening” and predicted that the Fed will raise rates beyond five and a half percent.
“This will cause a hard landing, a recession, at some time,” said Brown. “So we’re sticking with our recession call, our hard landing call.”
Brown predicted a recession “in the not too distant future” of “the next year or so.”
Triangle venture fund ‘pulling money out’ of Silicon Valley Bank
Will Rates Increase?
The Fed’s policy rate is currently at 4.50%-4.75%.
“So, you know, think about rates right now, the Feds up in the 4 percent range, but inflation is up in the 4 percent range, so the real interest rate remains really close to zero,” said Brown. “That’s still accommodative, by historical standards. So it’s really just now that the Fed is getting to an interest rate stance, that would be restrictive.”
Earlier this week, Federal Reserve Chairman Jerome Powell said “no decision has been made” about increasing interest rates. Powell made this comment before Congress on Wednesday.
“We’re sticking to our forecasts that the Fed is going to have to continue to raise rates, that they remain a bit behind the curve, that there is a lot of current strength in the economy that’s going to have to come out somehow,” said Brown.
The Fed will likely consider today’s job numbers and next week’s inflation numbers when discussing rate hikes at its March 21-22 meeting.
“Even an increase in labor force participation and a slight slowing in wages is not going to be enough to kind of significantly get the Fed off the mark, in terms of aggressive rate cuts over the rest of this year,” said Brown.
