The unemployment rate rose unexpectedly in February

Will they, or won’t they? Questions have abounded about whether the Fed will be content with another 0.25% rate increase later this month or will feel compelled to take a more aggressive 0.5% in response to recently hot economic data.

Along with next week’s February CPI print, today’s release of the February jobs report was expected to potentially provide some clarity. What it did was provide ammunition for those in either camp, making the upcoming report on consumer prices even more critical.

The unemployment rate rose unexpectedly in February to 3.6%, a 0.2% increase from the prior month, as labor force participation rose for the third consecutive month. Households reported that 177,000 more individuals were employed in February, but the ranks of the unemployed swelled by 240,000 to nearly 6 million, enough to lift the jobless rate off its recent 3.4% cyclical low.

An uptick in unemployment could be viewed by the Fed as some evidence of progress in its goal of loosening up an exceptionally tight labor market. Even so, the Fed’s December projections called for unemployment to rise sharply to 4.6% by the end of 2023, suggesting that there’s a long way to go for the Fed to be comfortable.

Undoubtedly less comforting to policymakers was the stronger-than-forecast gain in nonfarm payrolls, indicative of employers still hiring at a rapid clip. Job creation topped 300,000 for the month, although downward revisions to the preceding two monthly tallies shaved 34,000 from previously reported totals. Even with the revision, the net gain of 277,000 was above consensus expectations.

Job creation was heavily tilted toward the service sector again last month, with nearly one-third created in the lower-wage leisure & hospitality sector. Those jobs had been slower to return in the early stages of the recovery as consumer spending was heavily tilted toward goods and social distancing measures restrained travel. The fact that such a large portion of the new jobs created were lower-wage positions may help to explain the moderation in wage growth at the margins.

The pace of job creation has been unsustainably strong in recent months, leaving the Fed with some tough decisions ahead. It’s widely believed that the aggressive rate increases of the past year haven’t yet been fully absorbed by the economy. Even if policymakers stopped today, the lagged effect of prior rate hikes is expected to create an increasing headwind to growth ahead. Would that be enough? How much more needs to be done? That remains to be seen, but the Fed isn’t done yet. Instead, there are strong and growing indications that policymakers are leaning toward doing more than would have been expected even a few months ago.

The fact that inflation remains well above the Fed’s target may be the linchpin to the Fed’s March policy decision. It appears that the peak for the consumer price index was established last summer, but prices are still rising at an uncomfortable pace. Above all else, it appears that the Powell Fed remains committed to not repeating the mistakes of their predecessors in the 1970s. If anything, the Fed appear committed to getting the inflation genie back in the bottle, even at the cost of job losses and a potential recession.

Beyond the forthcoming rate announcement, the Fed will also release updated economic projections later this month. Those should provide significant insights about how their views have evolved in response to stronger data since December. Investors had been skeptical about the Fed’s repeated warnings that they intended to continue to raise rates and likely hold them higher for longer than the market was anticipating. More recently, it appears that the markets are getting the message.

The bottom line? An uptick in unemployment notwithstanding, strong job creation in February will have the Fed’s attention and keeps the potential for a 50-basis-point rate hike on the table. Next week’s CPI report looms large. One thing remains certain: the Fed isn’t done yet.