March Jobs Surprise and Inflation — Why Rate Hike Fears Are Overblown

The market showed once again this week how it turns good news into bad.

The US economy added 178,000 jobs in March. February had seen a loss of 133,000, and expectations were for just 59,000 new jobs. More than triple the forecast. The unemployment rate ticked down to 4.3%.

Under normal circumstances, this is unambiguously positive for stocks. Strong employment means consumer spending holds up, which supports corporate revenue.

The market's reaction was the opposite.

Setting the Scene — the Fed's Double-Edged Scale

When the Fed decides on interest rates, employment sits on one side of the scale and inflation on the other.

Weak employment leads to rate cuts to stimulate the economy. High inflation calls for rate hikes to cool prices. Both sides cannot look good simultaneously. When one improves, pressure shifts to the other.

With employment surprising to the upside, the Fed's attention locked onto inflation. Job market concerns have faded. The only remaining mission is to bring prices back to the 2% target.

The problem is that we are nowhere close.

The Backdrop — Inflation Is Not Over

Friday's March CPI report is the key data point this week.

Economists forecast that prices increased by a full percent for the month — more than three times February's rate. On an annual basis, 3.3%. Surging gas prices are the primary driver.

Core CPI, stripping out volatile food and energy, is expected at 2.7% year-over-year. Still well above the Fed's 2% target.

This persistent inflation has taken further rate cuts completely off the table. The CME FedWatch tool now forecasts that the Fed will hold rates steady through October 2027.

Not just hold. A worse scenario is emerging.

The Turning Point — Rate Hike Fear

Strong jobs plus stubborn inflation equals rising odds of a rate increase.

Markets are beginning to price in that possibility. Remember what happened during the Fed's 2022 hike cycle: the S&P 500 fell more than 20% and the tech-heavy NASDAQ plunged 30%.

Rate hike fears alone create meaningful near-term downward pressure on stocks.

Why Rate Hikes Are Unlikely to Happen

Here is where my view diverges from market consensus. The probability of the Fed actually raising rates is extremely low.

Chair Powell's term expires in May. The president's nominee to replace him, Waller, has supported hikes in the past — but would the president have nominated him without prior alignment on policy direction? The most recent Fed board nominee, Steven Miran, is an outspoken advocate for rate cuts, dissenting from the rest of the board. The president himself has publicly stated that the next chair will lower rates.

The president cannot order the Fed to cut. But consider the DOJ investigation into Powell, the investigation into Fed Governor Cook, and the near-daily pressure campaign for rate reductions. What are the realistic odds that the new chair pursues rate hikes after taking the position?

Extremely low. The force vector points toward cuts, not hikes.

What Comes Next — the Bull Market Is Not Done

The picture assembles like this:

Rate hike fears dissipating (or at minimum, not materializing) plus fiscal stimulus from tax cuts plus 18% corporate earnings growth projected this year.

A 10% correction arrived on Iran and AI fears. But as long as these three drivers remain intact, the bull market has not run its course.

The near term — the next month or two — may be rough. Friday's CPI release has the potential to rattle markets. But this is not a sell signal. It is a signal to hold steady and let the fundamentals do the work.