“In my opinion, recession is Fed policy right now,” said Lauren Goodwin, economist at New York Life Investments. “Chair Powell has always said that when inflation is high, the economy doesn’t work for anyone. To get inflation back to where the Fed is comfortable with a stable economic backdrop, we need to have a recession first.”
These circumstances make Friday’s jobs report a critical data point. Coupled with next week’s CPI data, the jobs report could help solidify views on whether the Fed will raise rates by either a quarter of a percentage point or a half of a percentage point when it meets later this month.
Weak jobs in February — economists are forecasting the economy added 225,000 jobs last month — could mean the Fed should take it easy to see if the string of rate hikes so far has an impact. But if hiring happens much faster than expected, or wages soar, the Fed could be forced to hike rates faster.
The shift in Wall Street thinking this week was evident in the US 2-year Treasury yield. Yields, which are very close to interest rate expectations, skyrocketed after Mr. Powell testified before Congress, topping 5 percent for the first time since mid-2007. By Thursday evening, the yield had fallen to 4.87 percent.
The movement in the stock market wasn’t quite as strong, although selling picked up over the week. Before the start of trading on Friday, the S&P 500 was down more than 3 percent this week.
However, there are some reasons for stock investors to remain optimistic.
Indeed, when the yield on the two-year bond rose sharply this week, investors’ inflation expectations for the same period fell. This indicates investors’ belief that the Fed will manage to bring inflation down over time, although rates need to keep rising to achieve that goal, said Brad McMillan, chief financial officer of the Commonwealth Financial Network.
“I see the market saying the Fed is doing what it needs to do,” Mr. McMillan said. He noted that the 10-year Treasury bond yield – which reflects longer-term forecasts for growth and inflation – has remained relatively stable in recent weeks.