Week of June 12, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
After a busy year of rate increases, the U.S. Federal Reserve decided to pause this week. But don’t assume it’s done. The Fed and other major central banks find themselves in this advanced endgame as they calibrate how much more tightening is needed. While inflation is coming down, it’s still high. Central bank rate setting works with a difficult-to-forecast lag, which forces central banks to become more reflective and data dependent about what remains to be done. The Fed seems to think it needs to increase rates another 50 basis points this year, while markets think 25 basis points is enough. But both appear to agree there will be no rate cuts this year, something the market was slow to accept.
The biggest insight from Fed Chair Jerome Powell’s press conference was him praising the growth benefits of a tight labor market rather than its otherwise assumed corrosive effects. That’s in line with recent research from Ben Bernanke and Olivier Blanchard, two titans of monetary thought leadership, showing the tight labor market accounted for only a minority of excess inflation as of early 2023.
However, Bernanke and Blanchard warn that if the demand for and supply of labor is not brought into balance, this could keep inflation above target. One encouraging nugget from their modeling is that an easy way to engineer that could be to reduce the number of job openings below available workers. If that works, then a surge in layoffs could be avoided in getting the economy back to normal. That gives some credence to the Fed’s forecast of a soft landing.?????
Source: Financial Times, 2023.
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