The week of September 19th was of course, dominated by the Federal Reserve. The rise in interest rates (0.75%) was widely expected and priced into the markets, but statements of the chairman Jerome Powell took center stage. The dissection and scrutinization of those statements revealed Jerome Powell remains stalwartly close-chested. In a nutshell, modest growth, a war in Ukraine, moving to a restrictive monetary policy, and staying there until inflation is contained. Sounds familiar?
On Thursday the treasury yield curve ticked up on the 1 and 2 year going from 4.03% and 3.96% to 4.08% and 4.02% respectively. The longer end of the curve remains fairly neutral to the policy at 3.5% for the 30 year down from 3.59%. What this means is that the information from The Fed more or less confirmed what the bond market already believes. If anything, the reaction from the longer side of the curve coming down shows that the bond markets are convinced that The Fed is on the right track.
The projected policy path is higher than the June projection by nearly a full percentage point over the next 12 to 18 months and an increase in unemployment to 4.4% from 3.9% projection in June. Long-term unemployment is generally considered “natural” at 4%, so those numbers don’t seem to be too extreme, but thus far the Fed has failed to reign in the economy.
So, where is the Fed likely most concerned? Wage spiral inflation. The current levels of jobs to seekers is substantial giving employees the leverage to demand higher wages which costs are then passed on in the form of either lower profits or higher prices from the employers. The services industry faces a particularly high risk from wage inflation. The preferred solution of increasing the number of job seekers falls outside of the Fed’s powers and fiscal policy appears unlikely to accomplish that solution leaving The Fed to try and decrease the number of jobs available. Read: slow the economy.
As of the writing of this (Thursday 22-September) the Initial Jobless Claims of 213,000 and the Continuing Jobless Claims of 1.38M are lower than the previous month. While we get that information today The Fed almost certainly had a broad idea of what it was when they made their latest statements.
On Friday the PMI flash reports will be released with an expectation of 51.4 for manufacturing and 46.0 for services. If those numbers come in higher it will be an indication that the economy is even stronger which will lead to an expectation of even larger rate increases. The big event on Friday will be Powell, Brainard and Bowman at 2PM EST at the Fed Listens event. Let the dissection and scrutinization begin!
Next week will be a big week. Durable goods and capital goods orders start the week on Tuesday at 8:30 AM EST followed by housing index and then the consumer confidence index. The Fed wants these numbers coming in weak to indicate that the economy is slowing. But not too weak…
Look to Thursday as always for the jobless numbers and Q2 Gross Domestic Product and Gross Domestic Income (GDP and GDI) and final sales revisions. The Fed would like the revisions to be unchanged with a broader preference for GDI and final sales to weaken.
Friday is the crème of the week with the all-important PCE reports, the Chicago PMI, and the UMich consumer and inflation indexes. If PCE comes in strong it implies that the biggest sector of the economy (consumption) is still roaring ahead which will signal an even faster move deeper into restrictive interest rates. The inflation expectation coming in with an increase will cause nervousness but unless it trends higher for an extended period, The Fed will likely discount it.
Always entertaining to try to explain why we need a bad economy in order to prevent a bad economy…
Franklin Ochs, CFA®
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