Federal Reserve chair Jerome Powell’s prepared remarks for his semiannual testimony to Congress opened the door to a return of 5-basis-point hikes at the March meeting if the incoming data flow warrants it, Morgan Stanley analyst Ellen Zentner said in a note this week.
Upside surprises to Friday’s payroll report could drive a faster and longer tightening cycle, the analyst said.
Powell reiterated his strong commitment to returning inflation to a 2% target.
While the Fed has made some progress, it has been bumpy, the analyst said.
Stronger economic data in recent releases suggest the peak rate of interest rates is likely higher than previously anticipated in December, she said.
Powell’s assessment of the economic outlook acknowledged that higher rates are impacting interest-sensitive components of the economy, including housing, but there has been a concerning reacceleration in activity in January, Zentner said.
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The testimony noted the positive impact on growth from the unseasonably warm weather in January, but upward revisions to historical data raised concern that growth has not slowed as much as was previously thought, the analyst said.
On inflation, while there has been progress on core goods prices, there is little sign thus far in the category of core services excluding housing, which accounts for month than half of core consumer expenditures.
The labor market remains extraordinarily tight and the Fed will need softening in jobs and wages in order to make progress on core services ex housing inflation, according to Morgan Stanley.
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