US 10-year yields rose by five basis points in Asia after surging by 14 basis points on Friday following the US employment data. Federal Reserve Chair Powell’s statements in an interview on CBS’s “60 Minutes” program broadcast this Sunday in the United States further dampened investor optimism. Powell stated that one should not act too early and that the job should be finished. The Fed Chair also mentioned that he did not expect policymakers to “radically” change their interest rate forecasts for 2024, which in December showed that they expected their benchmark interest rate to reach 4.6% by the end of the year, according to their median estimate.

On the other hand, investors have lowered their rate cut expectations in March to 20%, down from 40% before last Friday, as economic resilience reduces the likelihood of imminent policy easing. However, they still expect five rate cuts this year, compared to three expected by the Fed.

Fed officials are likely to continue opposing such significant rate cuts. During the CBS interview, the Fed Chair stated that the central bank had misinterpreted the price increases in 2021, attributing them to temporary supply bottlenecks. “In retrospect, it would have been better to tighten policy earlier,” Powell said. Powell’s remarks leave no room for complacency in the Fed’s fight against inflation.

Furthermore, data released on Friday showed that unemployment remained at a historically low level of 3.7% in January, with employers adding 353,000 jobs. Average hourly wages accelerated by 0.6% compared to the previous month, marking the most significant increase since March 2022. The economy is strong enough to generate a high level of employment and a 4.5% hourly wage, suggesting high inflation. Additional evidence that the economy continues to progress is that consumer confidence surged in January to its highest level since 2005, according to the University of Michigan’s final confidence index.

While Fed officials hope that employment growth will remain strong enough to keep the economic expansion intact, they would like to see more moderate wage increases while waiting for inflation to slow down to its 2% target. Economic data contradict this scenario.

The most significant part of the January employment report concerned upward revisions for the last quarter. These revisions showed that the labour market was more robust in the second half of 2023 than previously thought. This suggests that upward pressure on wage growth will persist, making it more challenging for the Fed to cut its rates.

In addition, the political context is complicated. The timing of this year’s policy pivot poses unique challenges for the Fed. Rapid price increases have angered Americans and weighed on President Joe Biden. Rate cuts this year expose the Fed to accusations from Republicans that the central bank is trying to boost Democrats by aiding the economy before the elections.

For all these reasons, the Fed will require robust economic data confirming victory over inflation before embarking on a rate cut. Based on the latest data, we are far from that point.