Exactly three weeks ago today, the Fed came out with a “surprisingly” large 75-basis-point rate hike. And it seems to have finally broken the back of the inflation trade, with early signs it may also help bail out the U.S. consumer. In the past four weeks (which includes the market’s anticipation of the super-sized hike that was coming), commodity prices…
positive news for the U.S. consumer. Falling gasoline prices are perhaps the most visible and frequent price squeeze on households. Falling grocery store prices would be even better, and the recent plunge in commodity prices at least points towards hope on that front. In other words, in three short weeks the Fed has managed to reset the market's long-term inflation expectations back to their 2% target, and made a huge move in the right direction on the consumer front as well.
And the urgency of their need to move was underscored in the data today that showed the last major piece of the inflation puzzle--the labor market--still remains in dangerously overheated territory. The number of U.S. job openings failed to drop sharply, and was still well over 11 million as of May, which will keep upward pressure on wages and inflation in the months ahead.
There is simply no sign of a sharp weakening in the labor market, even in more recent weeks. Jefferies looks to activity on indeed.com, whose postings still point to"well above 11 million" job openings in June. Weekly jobless claims have also remained firmly low, meaning Friday's official monthly jobs report is unlikely to reveal too much new news on that front.
In fact,"there is no convincing evidence that the Fed's actions have had any material impact on labor demand," wrote Aneta Markowska of Jefferies this morning."More importantly, labor demand is not cooling enough to ease wage pressures." There is no sign that the quits rate is falling back to normal, or that layoffs are picking up, she notes;"Thus, the balance of power remains firmly tilted toward labor.
All of which means that the upward pressure on prices in the service and transportation sectors may persist until or unless the Fed tightens policy even further to fix the imbalance. Those who are already saying the Fed's big hikes are causing a recession, or were a big mistake, or are certainly over now--well, I wouldn't be so sure. The good news is, the super-sized hike last month is at least one big step in the right direction.
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