Summary :
“The fact of the matter is this gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. As of Friday afternoon, markets were assigning about a 69% chance of the Fed enacting its third straight 0.75 percentage point interest rate hike when it meets again in September, according to CME Group data.
That will add pressure to the Fed’s balancing act of using rate increases to temper inflation without tipping the economy into recession. “The question though now is how much longer (and higher) will rates have to go before inflation can be brought under control?”
You’d be hard-pressed now to find a recession in the rearview mirror. What’s down the road, though, is another story.
There is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July. A 3.5% unemployment rate, tied for the lowest since 1969, is not consistent with contraction.But that doesn’t mean there isn’t a recession ahead, and, ironically enough, it is the labor market’s phenomenal resiliency that could pose the broader economy’s biggest long-run danger. The Federal Reserve is trying to ease pressures on a historically tight jobs situation and its rapid wage gains in an effort control inflation running at its highest level in more than 40 years.”The fact of the matter is this gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “It’s not going to be an easy task to continue to tighten without negative repercussions for the consumer and the economy.”Indeed, following the robust job numbers, which included a 5.2% 12-month gain for average hourly earnings, traders accelerated their bets on a more aggressive Fed. As of Friday afternoon, markets were assigning about a 69% chance of the Fed enacting its third straight 0.75 percentage point interest rate hike when it meets again in September, according to CME Group data.So while President Joe Biden celebrated the big jobs number Friday, a much more unpleasant data point could be on the way next week. The consumer price index, the most widely followed inflation measure, comes out Wednesday, and it’s expected to show continued upward pressure even with a sharp drop in gasoline prices in July.That will add pressure to the Fed’s balancing act of using rate increases to temper inflation without tipping the economy into recession. As Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock put it, the challenge is “how to execute a ‘soft landing’ when the economy is coming in hot, and is landing on a runway it has never used before.””Today’s print, coming in much stronger than anticipated, complicates the job of a Federal Reserve that seeks to engineer a more temperate employment environment, in keeping with its attempts to moderate current levels of inflation,” Rieder said in a client note. “The question though now is how much longer (and higher) will rates have to go before inflation can be brought under control?”
