Just when you thought we had smooth sailing with interest rates we got a reminder on the challenges we are facing this year. The January jobs report came out this morning and it came in at a whopping 517,000 jobs added vs the 187,000 that was expected by the market. This strong number is bizarre because if you look at the headlines all you are seeing are continued layoffs. Amazon, Facebook, Google, among others are laying of tens of thousands of workers. This seems to suggest the job growth is more in the small to medium size companies. Mortgage rates popped back up after this report came out. Although rates are roughly around where they were to start the week. As one commentor put it rates are “violently unchanged.”

On the face of it a strong jobs number seems like a good thing right? More jobs mean that the economy is still strong. Unemployment rate continues to be near all time lows, you would have to go back to 1969 to find lower unemployment numbers. The only problem is that when your trying to fight inflation a strong economy isn’t ideal. Low unemployment means that wage growth will continue to grow which means more money into the economy which pushes prices higher. The Fed will look at these numbers and most likely to conclude that more rate hikes are going to be needed.

The jobs report overshadowed the Fed meeting on Wednesday. As expected rates were increased by a ¼%. Fed chair Jerome Powell had something for everyone in his Q&A sessions but overall the market seemed to like what he said as we saw a rally in stocks and bonds. That was until today! The Fed is looking at the tight labor market and the fact that the stock market is up over 10% to start the year and they are probably not to thrilled. That doesn’t point to an economy that can’t handle more rate hikes. Right now the market is still pricing in rate cuts by the end of the year. That’s tough to imagine right now. What will really put the Fed in a bind is if the inflation report that comes out on 2/14 shows that inflation is still falling rapidly. However if inflation comes in higher than expected then we may have to start bracing for a reversal in the lower rate trend for the time being. There is only so much negative data the market can take before expectations are adjusted that the rate hike cycle is not done yet.

Recap:

-Fed raised interest rates by ¼%

-Jan Jobs report came in much higher than expected 517k vs 187k expected

-Strong jobs report could mean the Fed isn’t done raising rates yet

-Major rate implications for next inflation report on 2/14