Jobs Report Gives the Fed the All Clear to Go All Out

(Bloomberg Opinion) -- The Federal Reserve just got the green light to be as aggressive as it sees fit in raising interest rates, and markets need to start paying attention. U.S. jobs continued to boom in March, with nonfarm payrolls increasing 431,000 last month; February's number was revised to 750,000 from 678,000. The unemployment rate fell to 3.6%.

In the near term, that means the economy may be entering another “good is bad” period. The scramble for labor is likely to keep upward pressure on the hottest inflation in 40 years and give the Fed confidence — justified or not — that it can tighten monetary policy without tipping the economy into a recession. Wage gains accelerated in March, and it seems unlikely that the trend will reverse soon. Consider the National Federation of Independent Business's survey published earlier this week, which showed that the number of small businesses offering compensation increases is near the highest on record. Many firms still plan to raise pay, it showed.

What about the U.S. consumer? Consumer sentiment has plummeted as gasoline surged past $4 a gallon in early March, but it isn't clear that spending patterns have turned as negative as the mood. In Fiserv's data, same-store retail sales in the U.S. appear to have dipped 4.3% in March compared with those a year earlier, with the drop more pronounced for clothing and accessory retailers.

But it's not clear we've reached an inflection point yet, especially because U.S. households acquired so much wealth during the pandemic through real estate, stocks and stimulus payments. As my Bloomberg Intelligence colleague Poonam Goyal pointed out, March comparisons could prove perilous, in part because of the impact of stimulus last year. What's more, Easter falls on April 17 this year, which means the holiday shopping season comes later, and the tax refund season — which can often fuel purchases — started earlier. March is sandwiched in the middle.

In Facteus data from a base of 40 million U.S. debit cards, total spending appears to be holding up, especially compared with pre-pandemic data from 2019, though it's still possible consumers are shifting from nice-to-have discretionary spending to now pricier essentials. Taking the data as a whole, the surge in gasoline prices probably had some impact, but it hasn't been punishing.

So for the time being, the Fed has carte blanche to do what it needs to do, and the stock market still hasn't received the memo. The S&P 500 Index was flat on Friday and was only about 5.5% below its record high.

According to the Cleveland Fed's nowcast model, inflation is projected to rise to another four-decade high of 8.4% for March. Meanwhile, fed funds futures already suggest the market is bracing for more than 2 percentage points of increases by the end of the year, including a high probability of a rare 50-basis-point move at the next meeting on May 4. That's already a precipitous increase, yet it would only get the implied interest rate to around the so-called neutral rate, when policy neither fans nor restricts growth and inflation. As former Treasury Secretary Lawrence Summers and my Bloomberg Opinion colleague Bill Dudley have said, the market clearly hasn't grasped what it may take to rein in consumer prices. The latest jobs data only reiterates that, yet the stock market continues to drift along in a state of blissful ignorance.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.