Strong jobs and wage gains fuel concern that the Federal Reserve could raise rates even faster

Published Fri, Feb 4 202210:42 AM ESTUpdated Fri, Feb 4 202211:18 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

A surprisingly large increase in jobs and higher-than-expected wage gains in January are raising concerns that the Federal Reserve could move faster to boost interest rates, economists say. The economy added a stunning 467,000 jobs in the month , and revisions added 709,000 more jobs to November and December payrolls. Average hourly wages jumped 0.7%, or 5.7% over last year. "The labor market is not just strong. It's on fire," said Chris Rupkey, chief economist at FWDBONDS. "It's really going to intensify those inflation flames." Economists had expected 150,000 jobs were created in January, according to Dow Jones. But the markets were braced for a much weaker decline of several hundred thousand jobs, with many prominent economists forecasting negative numbers due to omicron. Bond yields, which move opposite price, jumped after the news. The 10-year Treasury yield surged over 1.9%. An inflation story for investors Diane Swonk, chief economist at Grant Thornton, said the very hot wage gains make the jobs report an inflation story, and market focus now swings to the consumer price index next Thursday. She expects CPI to rise to 7.2% from December's already sizzling 7% headline number. Market chatter focused on the possibility that the central bank could now front load its interest rate increases with a half-point hike in March to combat hotter inflation. Swonk said it is more likely the Fed begins with a quarter-point increase in the fed funds rate in March and then raises by a half-point in June. Fed Chair Jerome Powell did not shut the door on the idea of a half-point hike when he briefed the press after the central bank's last meeting. "We know the Fed has their work cut out for them. I don't know what they're going to decide. They're further behind the curve than anyone could have imagined," said Chris Rupkey, chief economist at FWDBONDS LLC. In the fed funds futures market, traders Friday more aggressively priced in a sixth rate hike for 2022. The April futures contract was at 0.42%, signaling that one quarter-point hike and a bit more are expected in March. The March hike would be the Fed's first move to raise its fed funds rate range from zero since it slashed the rate to fight the pandemic in early 2020. Heightened expectations for hikes Ben Jeffery, rate strategist at BMO Capital Markets, said there was a jump Friday in the January 2023 fed funds contract, indicating investors are raising their expectations for more hikes this year. The contract was at 1.40%. "We're getting toward six hikes," he said. Jeffery said the data affirmed market expectations, that were already pointing to five interest rate hikes. The Fed's forecast has included three quarter-point hikes this year. "I think we have a very hot economy. The labor market is tight. All of this is known to the Fed, and that's why we have liftoff in March, with the balance sheet run off after ... and probably five rate hikes this year," Jeffery said. Rupkey said there's now a greater possibility that the Fed raises rates at every meeting this year. "Either way you want to look at it, bond yields are surging this morning. Number one, it's because they're completely shocked and surprised. The whisper number was down 250,000," he said. "And second, they fear a return to normal Federal Reserve policy rates more quickly, after today's report." 'We couldn't have gotten it more wrong' Economists had expected that many hourly workers could have been counted as off the payrolls in January if they had called in sick. That could have resulted in a net loss of payrolls. The report included a record 3.6 million people on sick leave. But the industries that could have been most affected by that added the most employees. For January, the biggest gains were in leisure and hospitality, with 151,000 hires. Of these, 108,000 jobs came from bars and restaurants. Professional and business services accounted for 86,000, and retail was up 61,400. "We couldn't have gotten it more wrong — the market, pundits, everyone is shocked after today's revisions," said Rupkey. Swonk said seasonal factors affected the report. "They didn't let holiday hires go. They kept them on in a tight labor market to keep stores and restaurants open," she said. She has noted the Bureau of Labor Statistics has had a difficult time measuring the job market since the pandemic. There have been massive revisions, initially missing job losses, and then later recording job gains too slowly.

Wyomissing Restaurant and Bakery Buffet Team Leader Ed Hunt takes chicken out of the fryer, at the Wyomissing Restaurant and Bakery on Penn Ave in Wyomissing, Pennsylvania, January 22, 2021.

Ben Hasty | MediaNews Group | Reading Eagle via Getty Images

A surprisingly large increase in jobs and higher-than-expected wage gains in January are raising concerns that the Federal Reserve could move faster to boost interest rates, economists say.