Fed to key in on February jobs number ahead of rate-hike decision

The size of the Federal Reserve's next rate hike could depend largely on how many jobs U.S. employers added in February.

Economists expect the U.S. Bureau of Labor Statistics to announce March 10 that the U.S. added 220,000 jobs in February after 517,000 were added in January, which was the largest monthly increase since July 2022.

February job growth expectations range from 160,000 to 325,000, according to economists' forecasts compiled by Econoday. If the number comes in at or above the high end of that range, the Fed is poised to approve a 50-basis-point hike at its next meeting March 22, rather than another 25-bps hike, as it approved Feb. 1.

Another hotter-than-expected jobs report, potentially combined with another report showing persistently high inflation less than a week later on March 14, makes a 50-bps increase "more likely than not," said James Knightley, chief international economist with ING.

"There is less willingness to give the benefit of the doubt and be forward-looking [with economic data]," Knightley said. "[The Fed is] focusing much more on the here and now."

If job gains come in above roughly 250,000 in February, with monthly wage growth at or above 0.4%, the Fed will very likely raise rates by 50 bps at its meeting this month, said Gregory Daco, chief economist with EY Parthenon. If instead jobs growth is below 150,000, a 25-bps hike is the more likely outcome.

"There are signs the labor market is cooling, but it's neither rapid nor broad-based across sectors yet," Daco said.

Hike odds

After roughly two years of near-zero rates, the Fed began hiking rates in March 2022 to combat the highest inflation the U.S. has experienced since the early 1980s. It has since increased rates by 450 bps but recently seemed to be easing its hiking push.

A month ago, the odds of a 25-bps hike at the Fed's March meeting were over 90%. Those odds fell below 30% after Fed Chairman Jerome Powell appeared before congressional committees March 7-8, according to the CME FedWatch Tool, which measures investor sentiment in the fed funds futures market.

In testimony at those hearings, Powell said inflation, along with the employment and wage growth that feeds it, were all running hotter than expected, and Powell signaled that the central bank may respond by ratcheting up its rate increases.

"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," Powell said.

The economy is "past most estimates of maximum employment," Powell said March 7, a point reinforced by the U.S. Commerce Department's March 8 announcement that there were 10.8 million open jobs in January. With less than 5.7 million unemployed Americans in January, there were about 1.9 jobs for every potential worker looking.

Data guide

At his House hearing March 8, Powell cautioned that the Fed was not on a "pre-set path" and had made no decision yet on rate hikes.

"We will be guided by the incoming data and the evolving outlook," Powell said.

While the March 10 jobs number could decide how big the rate hike will be, the Fed will also need to realize that it is "just another data point" and should not let it jeopardize its policy credibility, said Michael Hewson, chief market analyst with CMC Markets.

"The Fed has put itself in an extraordinary bind and could go either way, but to shift up to 50 bps would bring about all sorts of accusations of flip-flopping," Hewson said. "Far better to continue with 25 bps and indicate several more hikes are coming."