FOMC Likely to Raise Fed Funds Rate by 50 BPS

• Job growth was 311,000 in February, well above the consensus, with only small downward revisions to December and January.
• The unemployment rate rose to 3.6% in February but remains very low.
• The FOMC is likely to increase the fed funds rate by 50 bps at its next meeting, concerned that the labor market remains too hot.

Job growth was stronger than expected once again, with the U.S. economy adding 311,000 jobs in February according to a survey of employers, compared to the consensus expectation of 205,000. There were small downward revisions to job growth in January (to 504,000 from 517,000), and December (to 239,000 from 260,000), but the overall picture is one of job growth that remains well above the economy’s long-term potential and is much too hot for the Federal Reserve. Over the last three months the economy has added more than 350,000 jobs per month on average.

The unemployment rate rose to 3.6% in February from 3.4% in January, which was the lowest rate since 1969. The increase in the unemployment rate came primarily from 419,000 people entering the labor force in February from January. The labor force participation rate-the share of adults working or looking for work-rose to 62.5% in February from 62.4% in January, the highest this rate has been since before the pandemic. But given that the labor force participation rate was consistently above 63% before the pandemic, the labor market remains exceptionally tight. The number of people employed in the household survey (different from the survey of employers) rose by 177,000 in February.

The very strong February jobs report, combined with only small downward revisions to job growth in December and January, mean that the Federal Open Market Committee is likely to raise the fed funds rate by 50 basis points when it meets in two weeks. The central bank is very concerned that the tight labor market is contributing to high inflation. With job growth still running well above the economy’s long-term potential, despite Fed tightening over the past year, the FOMC is poised to act aggressively again. 

PNC expects a recession starting in the second half of 2023 as the cumulative impact of Fed rate interest hikes filter their way through the economy. But the recession should be mild. Businesses will be reluctant to lay workers off given their current hiring difficulties. In addition, consumer, business, and bank balance sheets are strong, and the housing market is well-balanced. 

Job growth was mixed, with big job gains in leisure/hospitality services, education/health services, retail trade, government, and professional/business services, but job losses in transportation/warehousing and manufacturing.

Average hourly earnings rose a modest 0.2% over the month, good news from the inflation front. The average workweek fell to 34.5 hours in February from 34.6 hours in January. With more jobs, higher wages, but a shorter workweek, aggregate payrolls rose a small 0.1% in February.