Friday’s jobs report for February assuaged those concerns somewhat. Investors homed in on slower wage growth and an increase in unemployment, in part because more people are coming back to the labor force, two data points that suggest the Fed’s effort to slow the economy and rein in inflation may be working.
Some analysts said Friday’s employment data would take the pressure off the Fed when it met this month, and bets in financial markets tilted back toward a smaller, quarter-point rate increase instead of a half-point raise, which had been favored earlier in the week.
“I think most would agree that won’t happen,” Kristina Hooper, chief global market strategist at Invesco, said of the possibility of a larger rate increase in March.
However, others were less hopeful that the latest data on the jobs market would stay the Fed’s hand. Ron Temple, chief market strategist at Lazard, said that beneath the headline numbers were signs that wages continued to rise for portions of the labor force and that robust hiring remained a cause for concern. The United States added over 300,000 new jobs in February, nearly 100,000 more than economists had predicted.
“It’s still a scorchingly hot pace of job creation,” Mr. Temple said.
Investors’ split views point to the potential deciding influence of next week’s reading on consumer price inflation for determining what the Fed is likely to do when it meets.
The yield on the two-year U.S. government bond, which is sensitive to changes in interest rate expectations, reflected the shifting narratives in financial markets. The yield rose above 5 percent on Tuesday for the first time since mid-2007 after Mr. Powell’s comments as investors began to bet on higher interest rates to come.
The move rapidly reversed course, however, as SVB’s collapse created concerns about the effects of higher interest rates on the economy and the positive news on the labor market tempered the need for further increases. The yield on the two-year bond ended the week at 4.58 percent.
“Interest rate hikes are slowing the economy, and that is weighing on the U.S. economy,” said Lauren Goodwin, an economist at New York Life Investments. “What is happening to the banking sector is indicative of what investors fear could happen to other parts of the economy if interest rates continue to go up.”
Alan Rappeport contributed reporting.
