The Fed has been raising interest rates to try to lower inflation, which is one of their mandates. There other mandate is to seek full employment. On Friday the Department of Commerce released the employment data for February, and today JP Morgan, one of the Portfolio Strategists we utilize for client accounts, commented on this report in their Weekly Market Recap this morning…
Despite many layoff announcements, the recent unemployment rate and job openings figures, 3.6% and 10.8 million respectively, continued to signal tightness in the labor market. Beneath the surface, there is actually less strength than meets the eye with wages failing to keep pace with inflation the past 23 months. With that said, in his Congressional testimony last week Chair Powell mentioned the need
for wage growth to continue decelerating in order to gain confidence that core services inflation excluding housing is finally showing signs of softening.
Wage growth is a critical data point given its relationship with core services prices. Statistical analysis shows that wage growth has a more discernable impact on core services inflation than the unemployment rate. On Friday, we saw average hourly earnings for production and nonsupervisory employees increase 0.2% month-over-month in February and 4.6% year-over-year. This is the second slowest monthly wage growth we have seen since March 2021. While trending in the right direction, in the long run, wage growth closer to 3.5% would be required to achieve and sustain the Fed’s 2% inflation target. A wider mosaic of labor market statistics shows a broad deceleration, but compensation growth remains at elevated levels. As a result, the Fed is signaling that it is likely to take rates higher and keep them there for longer than previously expected. While the bond market is now better pricing in this path for rates, the equity market may see some volatility ahead given the increased odds that the Fed goes too far and ends up pushing the economy into recession.