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Fed officials reassess after jobs report; markets await Powell's remarks

Kitco News

Feb 7 (Reuters) - Federal Reserve policymakers have begun to take stock of an unexpectedly strong January jobs report, with Fed Chair Jerome Powell to face questions later on Tuesday on whether it has shaken his confidence that high inflation will come down without harsher steps by the U.S. central bank to slow the economy.

"I think it surprised all of us," Minneapolis Fed President Neel Kashkari said in an interview with broadcaster CNBC on Tuesday, referring to the blowout jobs report last Friday in which the U.S. government reported a gain of more than half a million jobs for January.

The numbers were far out of line with the looser labor market the Fed has expected and feels will be needed to ensure that wage growth also slows and inflation, which is still running at more than double the Fed's 2% target rate, continues to fall.

Kashkari, who has been more aggressive than almost all his colleagues in his assessment of how high interest rates need to go, had said a month ago that he forecast the central bank's policy rate should rise to 5.4%. The jobs report consolidated that view.

"It tells me that so far, we're not seeing much of an imprint ... on the labor market," Kashkari said. "It's pretty muted so far, so I haven't seen anything yet to lower my rate path."

Powell is due to speak to the Economic Club of Washington at 12:40 p.m. EST (1740 GMT), and the key unknown is whether he will join Kashkari and a handful of other Fed officials who since Friday have signaled an openness to pushing the benchmark overnight interest rate above the 5.00%-5.25% range forecast by Fed policymakers in December.

After last week's policy meeting, when the Fed lifted its policy rate by a quarter of a percentage point to the 4.50%-4.75% range, Powell in his repeated references to welcome signs of emerging "disinflation" left investors with the impression he might be open to stopping short on the December rate forecast.

Friday's data, highlighted by the upside surprise on job creation and a drop in the unemployment rate to its lowest level since 1969, has prompted an abrupt reassessment in financial markets. Bond yields have rocketed higher and interest rate futures markets now are squarely priced for a federal funds rate reaching at least 5.1%.


On Monday, Atlanta Fed President Raphael Bostic was one of those who said the central bank may need to lift borrowing costs higher than previously anticipated given the job gains. He noted that while a half-percentage-point rate hike was not his base case for the next policy meeting, it could be considered.

"It'll probably mean we have to do a little more work," Bostic told Bloomberg News. "And I would expect that that would translate into us raising interest rates more than I have projected right now." Bostic had previously forecast that the federal funds rate would top out in the 5.00%-5.25% range, like almost all his colleagues.

In his interview, Kashkari also pointed to other concerns that emanated from such a strong labor market, including an extremely robust services sector and fast growth in wages that was still not consistent with the Fed's inflation target, at a time when the central bank's steepest rate hiking cycle in 40 years is supposed to be sapping demand from the economy.

"It's hard to imagine that you're going to see very strong job growth while wage growth is moderating and that's what I'm looking for," Kashkari said. "We've seen no progress so far, virtually no progress in core services ex housing, and that's very tied to the labor market."

Reporting by Lindsay Dunsmuir; Editing by Andrew Heavens, Chizu Nomiyama, Andrea Ricci and Paul Simao
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