over 1 year ago • 2 mins
This wasn’t the cooling the Fed was hoping for. They’ve been trying to rein in the country’s still-high inflation with a series of aggressive rate hikes. And the strength of the labor market isn’t helping. See, a buoyant labor market means that companies will have to continue offering higher wages to attract workers, and then will pass those expenses along to their consumers in the form of higher prices.
So the US economy is likely to see more of the same thing: more inflation and more rate hikes.
If you’re looking for a silver lining, it may be this: the robust labor market indicates that the US economy is probably in better shape than many feared. But how well it will endure a continuing series of aggressive interest rate hikes from the Fed is an open question. Remember: as we explained here, the labor market is one of the last dominoes to fall when interest rates rise, meaning that if it’s still strong today, it’s simply because it hasn’t yet felt the impact.
The Fed has just done three consecutive “jumbo” rate hikes of 0.75 percentage points apiece, and the prospect of even more of those is bad news for almost every asset. And the jobs report not only increases the odds that the Fed will announce another 0.75 “jumbo” increase in November, but it also raises the possibility of another one in December.
Such aggressive hikes are likely to push stock valuations lower, and they run the risk of eventually pushing the US economy into a deep recession, which will put further pressure on company earnings and severely dent demand for commodities. More worryingly, it also raises the risk that something “breaks” in the financial system. The recent crisis in the UK – with the Bank of England’s intervention and the soaring costs of protecting against defaults – show that cracks can begin to appear in the markets quickly. And the faster rates rise, the worse it could become.
From an investment standpoint, the only asset that’s likely to thrive in this environment is the US dollar. But as we warned here, that comes with a whole different set of problems.
Let’s hope that those aggressive hikes will quickly push the economy and inflation lower. Because until then, good news will likely remain bad news…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.