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Higher rates now required by law
Since 1977, the Fed’s run under the following mandate:
With more people at work, we expect the monthly unemployment rate to start dropping.
That knocks out one of the Fed’s mandate goals.
By law (The Federal Reserve Act updates in 1977), without unemployment problems, the Fed MUST tame inflation.
Even if inflation isn’t much of a problem, the Fed will still be forced to raise rates, as we lay it out in the main article below.
Jobless claims clear path for rate hikes
Every Thursday, the government releases data collected from the states for unemployment insurance applications.
Today’s claims hit 199,000, the lowest level since 1969.
Here’s why that’s uber important.
Wages will rise
Economics 101: When supply is low and demand is high, prices rise.
That’s true for wages just as it is for consumer products.
The St. Louis Federal Reserve publishes tons of great data for free (AKA the FRED).
This chart shows the percent change in hourly wages year over year for each month.
While we always see a natural bit of growth, the recent trend exceeds the average.
The good news is there are a good number of people who can work but choose not to.
According to the monthly jobs report earlier this month, that number stands at ~7.419 million.
Data suggests that average weekly jobless claims sit around 245,000 and anything less than 400,000 helps to bring down the unemployment rate.
So, if weekly claims stay this low, we should see the unemployment rate drop significantly in the next monthly employment report.
For your Thanksgiving dinner discussions
A few of us are economic nerds.
For those that aren’t, here’s something to bring to the table to take the focus off who is vaccinated or wearing a mask.
What happens if unemployment drops but inflation slows on its own?
Think about this.
Unemployment appears to be recovering.
Inflation is bad, but not super widespread.
If supply chain snarls are the root cause, then we could see price increase decelerate after the Chinese New Year in February.
And THAT would make for an interesting predicament.
Imagine the Fed walking into its June meeting ready to raise rates and inflation is no longer a threat nor is high unemployment.
What would they do?
Realistically, they would still increase interest rates.
There are too many potential bubbles out there from housing to stocks.
And cheap interest rates keep zombie companies afloat by allowing them to borrow when they should go out of business.
The bottom line: Unemployment is improving quickly.
The Fed WILL raise rates.
The good news is that they may get to do it because they want to get things back to normal, not fight inflation.
That’s great news for the economy to continue booming and especially banks.
Yes, we sound like a broken record on banks. But we call it like we see it.
The current outlook favors them over nearly every other sector.