“At this point, the torrent of good news feels like apocalypse delayed,” said Aaron Terrazas, chief economist at Glassdoor. “There’s a lot of anxiety [among business leaders] that this report means interest rates are going to go higher, making borrowing more expensive, which is going to shut down consumption and investment. There is a sense that this is just kicking the can further down the line.”
A recent spate of strong economic news could lead the Federal Reserve to raise interest rates even more aggressively, which raises the chances of a sharper economic slowdown including job losses and business failures later this year. Already higher interest rates played a role in the collapse of Silicon Valley Bank.
Wall Street was on edge following Friday’s jobs release. The stronger-than-expected jobs report and the Silicon Valley Bank collapse caused all three major indexes to fall at least 1 percent by closing Friday.
“It’s been an incredible roller coaster ride,” said Liz Ann Sonders, managing director at Charles Schwab. “It’s hard to separate how much of the change in perception is based on various components of the jobs report or [Silicon Valley Bank], or some combination of the two.”
The Federal Reserve has been rapidly raising interest rates for the last year, in hopes of cooling the economy enough to bring down inflation. For a while, that seemed to work: Inflation edged down, job growth slowed and households and businesses appeared to be pulling back.
But since January, a host of strong economic data has reignited concerns that the central bank’s efforts haven’t gone far enough. In testimony before Congress this week, Fed Chair Jerome H. Powell cited a hot streak of data since the start of the year from large job gains, robust consumer spending and stubborn inflation pressures as reasons rates might have to go higher — and potentially more quickly.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell told the Senate Banking Committee on Tuesday. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Some economists now expect that when the Fed meets later this month, it could interest rates by one-half of a percentage point — double what was previously forecast. Since it can take months for higher borrowing costs to work their way through the economy, there are concerns that the end result could be a deeper-than-expected slowdown.
“Two or three months ago, there was a sense that we might achieve a ‘Goldilocks scenario’ — that job growth could slow without sharp declines,” said Matt Colyar, an economist at Moody’s Analytics. “But the past few months really complicate that narrative. It’s becoming more clear that the Fed will have to ratchet things up.”
New inflation data being released Tuesday will provide another snapshot of the Fed’s progress and factor into its next move. Inflation, which peaked last summer at 9.1 percent, has fallen for seven straight months, though there are fears that momentum may have stalled. Overall, prices are up 6.4 percent from a year ago.
The latest jobs report, released Friday, did include some signs of weaker momentum. The unemployment rate rose, from 3.4 percent to 3.6 percent, as more people joined the labor force. Wage growth also slowed, though it was unclear how much average hourly earnings figures were skewed by the makeup of jobs in the economy. Employers added jobs in lower-paying sectors, such as retail, and leisure and hospitality, last month, while laying off higher-paid office workers.
Still, the economy continues to generate hundreds of thousands more jobs per month than is needed to keep up with population growth.
“The job market’s resilience is a blessing and curse,” said Diane Swonk, chief economist for KPMG. “When you’re generating 815,000 new paychecks in the first two months of the year, that is stunning and it means the Fed has to keep hammering to slow down underlying inflation.”
For now, the Fed remains caught between its two main objectives: To keep inflation low and employment high. Achieving both long term without significant fallout is becoming more of a challenge.
Lawmakers from both sides of the aisle grilled the Fed chair this week on the possibility that higher interest rates could result in millions of job losses. Sen. Elizabeth Warren (D-Mass.) asked Powell what he would say to people who could be out of work if the central bank keeps raising rates and causes a downturn.
“I would explain to people … that inflation is extremely high, and it’s hurting the working people of this country badly,” Powell said. “We are taking the only measures we have to bring inflation down.”
Rachel Siegel contributed to this report.