What will Fed chair say about interest rates? Key economy news you need to know this week.

For months, stock markets have been buoyed by hopes that slowing inflation would prompt the Federal Reserve to cut interest rates sharply this year.

That wave of optimism has been tempered by some caution due to signs of stronger inflation in recent weeks. Investors and economists are still looking for the Fed to lower rates, though perhaps a bit later and less dramatically than anticipated.

Economic developments this week should help clarify what has become a cloudier 2024 outlook.

Fed Chair Jerome Powell will testify before Congress and could provide a more specific timeline for rate cuts.

And reports on job openings, service sector activity and February employment growth will shed light on whether the economy and labor market are cooling enough to help lower inflation from about 3% to the Fed’s 2% goal.

Is the crucial services sector growing faster than manufacturing?

30,000-foot-view: While factory activity has contracted for nearly 1½ years, the much larger service sector has expanded for 13 straight months. That’s largely because Americans have shifted their purchases from goods to services, such as dining out and traveling, since the pandemic has faded.

On Monday, the Institute for Supply Management is expected to announce that its service sector index showed growth again last month but at a moderately slower pace, according to economists surveyed by Bloomberg.

You should care because: The service sector makes up about 80% of the economy and the Fed is hoping it continues to expand without getting so hot that it drives up prices sharply.

One thing to watch: In January, an index of prices that service companies paid for materials and services jumped to the highest level since February 2023. That likely reflected temporary disruptions at the Panama and Suez canals that have delayed shipping, says economist Ian Shepherdson of Pantheon Macroeconomics.   

Fortunately, services prices are mostly tied to employee wage growth, which generally has been slowing, he says.

Are there more or less job opportunities?

30,000-foot-view: Since hitting a record 12 million in March 2022, job openings have trended lower but they’ve been volatile from month to month. In December, openings rose to 9 million from 8.9 million, still above the pre-pandemic average of about 7 million.

On Tuesday, the Labor Department is expected to report that openings dipped to 8.8 million, according to estimates by Nomura, an economic research firm.  And new hires and the number of people quitting jobs were likely stable at about 5.6 million and 3.4 million, respectively – at or below pre-COVID levels, Nomura says.

You should care because: Openings, hires and quits skyrocketed a couple of years ago as pandemic-related labor shortages left employers struggling to fill record vacancies and workers job-hopped for higher wages. A continued easing of that frenzy would boost confidence that pay increases, which feed into inflation, keep moderating.  

How soon will the Fed lower interest rates?

30,000-foot-view: Fed Chair Jerome Powell has said the Fed wants to see evidence of a more sustained fall in inflation toward the Fed’s 2% target and likely won't reduce its key interest rate in March. More recently, other Fed officials have said they’re in no rush to chop rates and economists have pushed back their forecasts for the first rate cut to June or later. A futures market that had projected six cuts this year has pared back its estimate to four.

In congressional testimony on Wednesday and Thursday, Powell will likely echo some Fed officials’ comments that the first rate decrease likely will come “later this year,” Capital Economics wrote in a research note. Don’t despair: The research firm still thinks that probably means mid-June. Powell is slated to testify before the House Financial Services and Senate Banking committees.

You should care because: Lower interest rates mean less expensive borrowing costs for mortgages, cars, credit cards and other loans; a stronger economy; and probably a frothier stock market.

Is the job market getting better?

30,000-foot-view: Job growth has been remarkably strong recently. Employers added 353,000 jobs in January and an average of 255,000 in 2023. That marks a slowdown from 377,000 the previous year but it’s still robust.

On Friday, the Labor Department is expected to announce that 193,000 jobs were added in February, signaling a further slowdown but another healthy gain.  

You should care because: A strong jobs report is still a very good thing but the Fed doesn’t want it to be so vigorous that it pushes up yearly wage growth and inflation. That could delay rate cuts.

Nomura says the recent pickup in payroll gains probably overstates the labor market’s health (after all, it’s based on a survey that gets revised), noting other measures reveal more restrained hiring. Average yearly wage growth jumped to 4.5% in January but that was likely skewed by bad weather that reduced employees’ hours and so pushed up their average pay, Nomura says. It expects a slowdown in pay increases for February.