The Fed’s tightening regime has little effect in slowing the labor market.
That means the Fed can’t give the stock market what it most wants: clarity in plans for future rate hikes, according to DataTrek.
“President Powell is not really in any position to offer that.” [clarity] Just so far,” DataTrek said.
The stock market wants clarity on the Federal Reserve’s future rate hike plans, but investors aren’t getting that anytime soon, according to DataTrek Research founder Nicholas Colas.
That’s because, despite the Fed’s pace of steep rate hikes so far this year, it has had little effect in calming the labor market, which in fact means wage inflation is likely to remain elevated.
This is significant because wage inflation is seen as one of the main drivers behind headline inflation, which Fed Chairman Jerome Powell is desperately seeking to tame by raising interest rates and cutting his near $9 trillion balance sheet.
“Markets want to clarify where the Fed will at least temporarily halt the current rate-raising cycle, but President Powell is really not in a position to offer that yet. For every sign that the US economy is slowing, there are others saying labor market conditions,” he said. Colas “Still Strong”.
An interest rate increase of more than 300 basis points so far this year has driven mortgage rates to levels not seen in nearly two decades, and has crushed the housing market, with price sales beginning to fall. Lower commodity prices and slowing retail sales also indicate that demand is not as strong as it was before 2022.
But at the same time, recent JOLTS data showed that vacancies rose in September by nearly half a million to 10.7 million. This means that there are still 5 million more jobs than the unemployed. Before the pandemic, there were 1.3 million more jobs than unemployed workers.
Additionally, the DataTrek “take this job and pay it” index, which measures smoking cessation rates among employees, was more than 11 percentage points above pre-pandemic levels. This means that employees still feel confident in their abilities to change jobs, and are more likely to receive a higher salary when they change.
“The FOMC’s monetary policy decisions have had little impact on the US labor market thus far, and are still tougher than they would like to see,” Colas said.
This increases the possibility that Powell will keep his cards close to his chest during his upcoming policy decision and subsequent speech, as he would like to leave the optionality in the December Fed rate hike decision. Between then and now, there will be two CPI and two jobs reports, which will allow the Fed to make a truly data-driven decision.
“As much as Powell tries to imitate Paul Volcker, he may have to borrow from Alan Greenspan’s playbook and reveal as little as possible about where he sees price hikes in the near term,” Colas concluded.
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