Powell says the strong jobs report shows that further Fed rate hikes may be needed to reduce inflation

Federal Reserve Chairman Jerome Powell said on Tuesday that last week's booming jobs report underscored why officials expect to approve another rate hike to tame inflation, and similar data in coming months could call for even sharper rate hikes. than expected.

"It shows you why we think this is a process that will take a significant amount of time," Powell said in a discussion at the Economic Club of Washington, D.C. "I think it underscores the message ... that we have a significant path ahead to get inflation down to 2 %.

The Fed last week raised its key short-term interest rate by a quarter of a percentage point to a range of 4.5% to 4.75%, and Powell said "a few more" similar hikes were likely, in line with the Fed's December forecast. That would have pushed the rate to a range of 5% to 5.25% from near zero last March, averting the most aggressive rate hike in four decades.

But on Friday, the Labor Department reported that employers added 517,000 jobs in January after wage growth in the final three months of 2022 slowed to a pace below 300,000 from more than 400,000 previously. The unemployment rate fell to a 54-year low of 3.4%.

Strong job growth and strong employer demand for workers could spur faster wage growth, which will trigger higher consumer prices.

Since then, the Standard & Poor's 500 has fallen and Treasury yields have risen. And markets now expect two more quarter-percent rate hikes.

"Since the labor market report, financial conditions are more in line with (the Fed's rate forecasts) than they were previously," Powell said.

He noted that the Fed's goal is to reduce inflation, not cripple the labor market. "We are trying to reduce inflation," he said. "We're not focusing on the unemployment rate."

Powell acknowledged that inflation eased significantly last year and Fed officials expect it to decline further in 2023. Consumer prices rose 6.5% year-on-year in December, down from 7.1% in November and a 40-year high of 9.1% in June.

"The disinflation process has begun," he said.

But he also said it could be difficult to sustainably reduce inflation without cooling the labor market. He noted that the only employment report could be a blip.

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But he added: “If we continue to see strong labor market news and high inflation news, we may have to do more than expected in terms of growth rates.