Federal Reserve chair Jerome Powell's prepared testimony reiterated that policymakers are keeping up their guard against inflation and that it's too soon for rate cuts. The S&P 500 rose solidly on Wednesday morning as Treasury yields eased on more evidence of moderation in the job market.
The ADP employment report showed that private-sector hiring in February picked up from January's modest pace, but came in just below Wall Street's expectations. The Labor Department's Job Openings and Labor Turnover Survey showed a dip in job openings in January, also a touch below estimates.
Federal Reserve Chair Powell
Powell's opening remarks were released at 8:30 a.m. The Fed chair's message didn't deviate much from that on Jan. 31, when Powell essentially took a March rate cut off the table, while saying that the economy was in good shape. However, the data has changed a bit since then, with a series of hot inflation reports for January.
Still, Powell said, "If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year."
Powell said that downside risks for employment and upside risks for inflation "have been moving into better balance." But that still implies that upside risk to inflation is the bigger concern.
Fed chair Powell noted that cutting rates too soon or too much could reverse progress in bringing inflation down "and ultimately require even tighter policy."
On the other hand, Powell said that waiting too long to ease policy "could unduly weaken economic activity and employment."
The March 20 Fed meeting will be important, because it will give policymakers a chance to reset expectations, if they want to. Barring a clear hiring downshift in hiring in Friday's official jobs report or especially tame inflation reports next week, there's a strong chance the Fed will signal just two quarter-point rate cuts this year, down from December's signal of 75 basis points in cuts.
Fed Rate Cut Odds
On Wednesday morning, markets were pricing in 3% odds for a March 20 rate cut and 22% odds for a rate cut by May 1. Odds of a June 12 rate cut stood at 69%.
For 2024, markets are pricing in a year-end Fed policy rate of 4.51%. Markets are on the fence between three and four quarter-point rate cuts this year, with slightly higher odds of the former.
ADP Employment Report
Private-sector employers added 140,000 jobs last month vs. expectations of 150,000, according to Econoday. January hiring was revised up to 111,000 from the initially reported 107,000.
ADP has a mixed track record of predicting the Labor Department's official jobs data out two days later. In January, ADP was way off the mark, as the government reported a 353,000 rise in payrolls, including government jobs. However, the government data is subject to revision.
Job Openings
The number of job openings slipped 26,000 to 8.863 million in January. December openings were revised down to 8.889 million from the initially reported 9.026 million.
The quits rate, or the percentage of workers leaving their jobs each month, eased to 2.1% from 2.2%, falling further below pre-Covid level of 2.3%. The quits rate peaked around 3% in late 2021 and early 2022.
The private-sector quits rate held at 2.4%, down from a peak of 3.3%. The quits rate held around 2.5% to 2.6% in the two years before Covid.
A lower quits rate means less worker turnover and tends to take pressure off employers to sweeten pay to keep workers from seeking greener pastures.
S&P 500
The S&P 500 rose 0.5%, holding their ground after release of Powell's remarks and the jobs data. The S&P 500 fell 1.1% in the first two days of the week, after closing last week at a record high. That record came on the heels of a 21.5% four-month gain for the S&P 500 through the end of February, which was the largest since the Covid reopening rally through July 2020.
The 10-year Treasury yield eased to 4.12%, after falling 8 basis points to 4.14% on Tuesday amid a soft service-sector hiring survey.
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