Data for the Federal Reserve to double down

Much is made about the Federal Reserve’s dual mandate of managing monetary policy to achieve full employment and stable prices. Over the first two years of the pandemic, it made the tactical — and correct — choice to favor jobs over inflation. Now, it has been forced to swap its focus.

In the week ahead, there will be more evidence that may support a more aggressive fight against inflation. Over consecutive days investors will see price and employment data for March. On Thursday, the Fed’s favored inflation gauge, personal consumption expenditure, is likely to show prices continue increasing on a generational-high trajectory. Russia’s war in Ukraine pushed up oil and grain prices. New COVID-19-caused shutdowns in China continue causing ongoing supply chain challenges. And a tight job market is helping support wage growth.

Which leads to Friday’s employment report for March. There are still about 2 million fewer people working in America than the month before COVID-19. And the unemployment rate has plummeted even as the proportion of Americans counting themselves as part of the labor force remains well-below its pre-pandemic level.

In a speech last week Federal Reserve Chairman Jerome Powell described the job market as “strong but showing a clear imbalance of supply and demand.” He acknowledged there isn’t anything the agency can do to encourage people to return to the job market. Instead, the Fed is cementing its fight against inflation.

The strength in the job market — albeit imperfect — gives the Fed cover to attack the instability of prices by raising its target short-term interest rates. It began that process ever so slowly earlier this month.

The threat of Russia’s war spreading, and the uncertainty of the COVID-19 virus may argue for a shorter and more shallow interest rate hiking cycle, but the futures market and investors are preparing for a stronger and faster response by the central bank. And the data out in the week ahead is likely to confirm it.