- It’s not unfathomable that central bankers will still be hiking rates even after the U.S. economy is deep within a recession, but investors still have reason to be hopeful.
- Investors can remain somewhat optimistic that the third and fourth quarters of the year may provide some form of respite as the Fed allows time for its policy shift to course its way through the economy.
Robust employment figures released on Friday have provided further reason for the U.S. Federal Reserve’s to remain steadfast in its pursuit of aggressive monetary policy tightening and justification to continue hike interest rates by 75 basis points later this month to quell inflation.
In June, U.S. employers added 372,000 jobs, keeping unemployment steady at 3.6% for four consecutive months.
The month of May also saw average hourly wages climbing 0.3%, a notch lower from earlier this year and could help the U.S. economy avoid a dreaded wage-price spiral that would fan the flames of further inflation.
According to Atlanta Fed President Raphael Bostic, the June employment report just “reaffirms that the economy is strong, and there is a lot of momentum in the labor market.”
Earlier this year, at a Rotary Club luncheon, Bostic suggested that September may be a time when the Fed could “pause” its rate hikes, depending on the economic circumstances.
While the jobs report is no doubt relevant in the overall decision-making matrix of policymakers, central bankers will be looking out for last month’s Consumer Price Index print to set the path of rates.
Investors are looking for signs that the central bank is scaling down its rate hikes as recent data indicate a slowdown in U.S. consumer spending.
Aggressive policy tightening by the Fed and other central banks have sparked fears of recession, depressed commodity prices, and dampened investor outlook for future inflation, as reflected by yields on certain U.S. government securities.
Regardless of the CPI data for June due out this month, it’s highly unlikely that the Fed will U-turn its policy course for now – policymakers will want to see several months of inflation trending back to the long-term target of 2% for that to happen.
Investors hoping for a premature resumption of “business as usual” by central bankers will need to manage their expectations as a single inflation print does not a trend make.
U.S. Federal Reserve officials took almost a year before they acknowledged that inflation was not “transitory” and their policy shift is still relatively immature, meaning that this course of action still has some ways to run.
It’s not unfathomable that central bankers will still be hiking rates even after the U.S. economy is deep within a recession, but investors still have reason to be hopeful.
For one, the current Fed has proved somewhat more flexible than its predecessors, willing to acknowledge its limitations and able to reverse policy in the face of irrefutable data that current measures are inappropriate for the economic environment.
Investors can remain somewhat optimistic that the third and fourth quarters of the year may provide some form of respite as the Fed allows time for its policy shift to course its way through the economy.