More of the same.
We decided to delay releasing the October update a week to include last week’s Fed meeting and jobs report, as October was more of the same. The theme of volatility/uncertainty continued throughout the month as rates grinded about 35bps higher across the curve.
The job market remains solid, and inflation continues to run stubbornly high, with both CPI and PPI coming in over 8% on a year-over-year basis last month, helping to give the Fed room to keep hiking rates for the time being.
As expected, the Fed hiked rates 75bps at its November meeting, the 4th straight hike of that magnitude. Though the Fed statement had a dovish tone, Chairman Powell squashed any hope of a FOMC pivot with a brutally hawkish press conference. A few quotes from the Chairman’s press conference:
Is a pause coming?
“It is very premature to be thinking about pausing. People when they hear ‘lags’ think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go,” Powell said.
Will the Fed be slowing the pace of the rate hikes?
“As we come closer to that level and move further into restrictive territory, the question of speed becomes less important… And that’s why I’ve said at the last two press conferences that, at some point, it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made,” Powell said.
“As speed becomes less important, the terminal level of interest rates and the length that the Fed will need to keep rates there take precedent,” Powell also said.
And given rate hikes have about a 9-12 month lag on their effects.
The Fed said it will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
“Fed Speak” or True Intentions?
Hoping the Fed would take its foot off the gas at this point was wishful thinking at best. The Fed needs the job market to soften and consumer spending to slow to relieve demand-side inflation. Powell said, “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. We will stay the course until the job is done.”
The question is how much of this is “Fed speak” vs. true intentions, given that the expectation of future tightening can have a similar effect to hiking rates.
Again, the Fed needs demand-side inflation to cool. Years of 0% interest rate and massive fiscal stimulation have resulted in a consumer base drunk on free money. The challenge for the Fed is it takes time for consumer behavior to change. Looking at the data, consumers are using more credit to keep their standard of living instead of changing buying patterns.
According to the NY Fed, “Credit card balances saw a $46 billion increase since the first quarter – although seasonal patterns typically include an increase in the second quarter, the 13% year-over-year increase marked the largest in more than 20 years.”
The pace of rate hikes is expected to slow as the Fed assesses the cumulative impact of the 375bps of tightening they have accomplished in the last eight months. The market is currently pricing in a 50bp hike in December and another 50bps-75bps of tightening in the first half of next year, putting Fed Funds at just over 5.0% in Q2 of next year.
October Jobs Report.
Job gains slowed in October but remain solid, coming in at 261,000. The participation rate dropped 0.1% to 62.2%, and the unemployment rate increased 0.2% to 3.7%. So on the surface, there is a little softening, but a deeper dive shows a growing divergence between “jobs” and “employment.”
Remember, the headline non-farm payroll (NFP) number is determined by the payroll (or “establishment”) survey, which is based on employer reporting. The unemployment rate and participation rate are based on the household survey, which is a phone survey conducted by the BLS.
According to the BLS, “The estimates differ because the surveys have distinct definitions of employment and distinct survey and estimation methods.” For example, The household survey has no duplication of individuals because individuals are counted only once, even if they hold more than one job. In the establishment survey, employees working at more than one job and thus appearing on more than one payroll are counted separately for each appearance.
But of note, since March 2022, NFP is up roughly 2.5 million while full-time employment has decreased by 490,000. So essentially, all net job gains are due to part-time employment, which paints a slightly different picture of current labor conditions.
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