over 1 year ago • 2 mins
There’s been a ton of talk recently about a “Fed pivot”, where the Federal Reserve would shift its stance away from aggressively raising interest rates and toward lowering them (or at least holding them in place). But some of that talk is likely to pipe down now, at least for a while, after key US data on Friday showed that the labor market had mostly shrugged off the impact of the hikes the Fed’s already done, without showing any real sign of weakening.
This chart shows the number of media stories mentioning the phrase “Fed pivot”. As you can see, the number spiked higher ahead of last week’s jobs report (green circle), hitting a high not seen since just before the Fed’s annual conference in Jackson Hole, Wyo., (red circle).
We’re currently operating under a dynamic where good news is bad news, and bad news is good news. In other words, good economic data means the Fed’ll have to keep the pedal to the metal, with more rate hikes. Bad economic data means the Fed can consider letting up on the pedal, halting those hikes or even pivoting, and reversing some of them.
For the Fed to pivot – barring an unexpected emergency in the financial market – we’d need to see certain conditions play out. First and foremost, there’d have to be a significant decline in inflation. We’ll see September’s consumer price index on Thursday, which is a key report, but it’s also worth keeping an eye on the personal consumption expenditures price index, the University of Michigan consumer 5-to-10-year inflation expectations, and the price of Treasury Inflation-Protected Securities. Secondly, there’d have to be evidence of cooling in the labor market. So it’s worth monitoring the weekly initial jobless claims, released every Thursday, as well as the monthly non-farm payrolls employment data, due November 4th. Mind you, there are other early-warning signals of a softening in the job market: a weak third-quarter earnings season, with companies missing expectations and downgrading forecasts would suggest that jobs are about to take a hit. Until those kinds of things happen, the likelihood that the Fed will pivot – or change from hawkish to dovish – seems a ways off.
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