“It’s my view that recession is the Fed’s policy at this point,” said Lauren Goodwin, an economist at New York Life Investments. “Chair Powell has been saying consistently that when inflation is high the economy doesn’t work for anyone. In order to bring inflation back to where the Fed will be comfortable with a stable economic backdrop, we have to have a recession first.”
These circumstances make Friday’s report on the labor market a critical data point. When coupled with next week’s reading on consumer price inflation, the jobs report could help solidify views of whether the Fed will raise rates by either a quarter of a percentage point or half a percentage point when it meets later this month.
A weak showing by the job market in February — economists are forecasting that the economy added 225,000 jobs last month — could add to the case that the Fed should take it slow, to see if the string of rate increases made so far is taking effect. But if hiring occurred at a much faster pace than expected, or if wages jumped, the Fed might be compelled to increase rates more quickly.
The swing in Wall Street’s thinking this week was evident in the yield on two-year U.S. government bonds. The yield, which closely tracks expectations for interest rates, shot higher after Mr. Powell’s testimony to Congress, rising above 5 percent for the first time since mid-2007. By Thursday evening, the yield had fallen to 4.87 percent.
The move in the stock market wasn’t quite so dramatic, though selling did pick up over the course of the week. Before Friday’s trading began, the S&P 500 had fallen more than 3 percent for the week.
There are, though, some reasons for stock investors to remain optimistic.
When the two-year yield rose sharply this week, investors’ expectations of inflation for the same time period actually fell. That suggests a belief among investors that the Fed will manage to lower inflation over time, even though rates will have to keep going higher to achieve that end, said Brad McMillan, the chief financial officer at Commonwealth Financial Network.
“I see the market saying the Fed is doing what they need to do,” said Mr. McMillan. He noted that the yield on 10-year Treasury notes — which reflects longer-term predictions for growth and inflation — had remained relatively stable in recent weeks.