Fed Watch

The Smoke Clears After Jackson Hole, Jobs Report Encouraging

The Smoke Clears After Jackson Hole, Jobs Report Encouraging

Hot labor market cooled moderately as employers slowed the pace of hiring, more people sought to rejoin the labor force, and pace of wage growth moderated. Deceleration came as a relief in contrast to the red-hot data characterizing much of the past two years. While the August jobs data reported this morning delivered some positive news, hawkish remarks from Fed insiders (Mester, Powell, Yellen) implied 75 bps is very much on the table for September’s FOMC. August CPI is scheduled to be released on the 13th. This is the other key economic datapoint Powell will be looking at to inform his actions and words at September’s FOMC meeting.

Job Growth: Neither too hot nor too cold. Some said it was a “goldilocks” report. As more Americans seek out work (labor force participation rate for workers aged 25-54 increased by the most since June 2020 to just under 83%), inflationary pressures could abate. Right now, one of the reasons for tightness in the labor market is that there are more job openings than job seekers. Adding job seekers to the market, which is what the report shows, slackens the conditions a bit and helps the Fed’s efforts to slow down inflation as pressures come down on wages.

Employers added 315k jobs, roughly in-line with estimates, and down from over half a million in last month’s report. The unemployment rate reached the highest level seen since February. While Friday’s data does not definitively answer the question of 50 vs 75 bps in September, it does suggest that the Fed may have an easier time engineering the elusive soft landing. The odds of a 75-bps point hike, as implied by Fed Futures markets decreased in wake of the report.

While supply chain issues are seen as more transitory, wage growth is seen as being one of the most problematic drivers of inflation going forward. Wage growth, which eased slightly to 0.3% in August, is still elevated this year, clocking in at around 5.2%. In the battle to achieve the desired soft landing that doesn’t require a significant rise in unemployment, slowing wage growth is key. Inflationary cycles can be thought of as a feedback loop such that companies pass on higher labor costs to consumers, leading workers to demand more pay as their purchasing power recedes.

Treasury Secretary Janet Yellen made some hawkish comments this week, largely toeing Powell’s line. “We will keep at it until we are confident the job is done” was Powell’s keynote take-away, and it should be no surprise that other government officials are giving him rhetorical support.

On Wednesday, Cleveland Fed president Loretta Mester (and voting FOMC member) said she sees rates rising to over 4% by early 2023 before the Fed can start easing. Markets are currently pricing in only a ⅓ chance of fed funds rising over 4% next year. Mester also said rates will remain elevated for some time and that she does not “anticipate the Fed cutting the fed funds rate target next year at all.” Although the bond market still sees cuts in 2023 as a possibility, Fed commentary has suggested the FOMC currently is dedicated to holding rates higher. Neel Kashkari even crossed the rhetorical Rubicon when he said he was happy about the market’s adverse price reaction to Powell’s Jackson Hole speech.

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