Biden Celebrates A Strong Job Market, But Fed Officials Think That Calls For More Tightening, Higher Interest Rates

Top Federal Reserve officials shared public remarks on Wednesday on the heels of President Joe Biden's second State of the Union Address and a press conference by Fed Chair Jerome Powell.

Neel Kashkari, president of the Minneapolis Federal Reserve, went on CNBC Live to comment on the surprisingly high job growth in January. The latest jobs report shows a massive addition of 517,000 jobs, nearly tripling economist estimates.

In his State of the Union speech, Biden called out the 3.4% unemployment rate as the lowest in over five decades, to a standing ovation from the Congress.

Yet for Fed officials, a strong job market is a signal that more tightening is needed. 

Kashkari said he too was surprised by the number. In his view, such a sign means that Fed tightening to date has not had much on an imprint on the labor market.

"There's some evidence that it's having some effect, but it's pretty muted so far," Kashkari said.

“It's very unlikely to see very strong job growth while wage growth is moderating and the Fed needs to see wage growth at around 3% "to be consistent with its 2% inflation target," he said.

That served as an indicator the federal funds rate needed to continue to go up, and Kashkari was set on a landing rate of 5.4%, in line with his own projections from December.

The Fed confirmed a new hike on the federal funds rate of 0.25% earlier this month, which placed the current rate at between 4.5% and 4.75%, with several economists anticipating that the end of the hike cycle is near.

Within the Federal Open Market Committee (FOMC), which decides what the federal funds rate should be, Kashkari sits on the side of the table that believed harder Fed tightening was necessary to bring inflation back down to 2%.

"I wish we saw more evidence that underlying inflation is trending the way we wanted it," he said. "But if you strip it all apart, the services side of the economy is still very robust, and wages are still growing at a rate that's in excess of being consistent with our 2% inflation target," Kashkari said.

On Monday, Federal Reserve Bank of Atlanta President Raphael Bostic expressed the same view in an interview with Bloomberg. Bostic said sustained growth on the labor market like that of January's would call for more hawkish monetary tightening.

He added, however, that the strong jobs data placed the U.S. economy closer to a soft landing scenario.

At a Wall Street Journal event on Wednesday, New York Federal Reserve President John Williams said taking the federal funds rate to between 5% and 5.25% seemed very reasonable, though he didn't take a jobs angle to support that remark.

Speaking at a separate event, Federal Reserve Governor Lisa Cook said moving in smaller steps would be the appropriate measure as the Fed assesses the effects of cumulative tightening in the economy and inflation, Reuters reported.

The Fed had been dialing down on rate hikes, with the last one being 0.25% and the previous one 0.5%, following four 0.75% hikes between June and November 2022.

Cook said she thinks inflation can be brought down to 2% "without a large increase in unemployment" and echoed the sentiment that a strong job market could lead to a soft landing scenario.

Photo: Courtesy Federal Reserve