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As we discuss in our main story, Federal Reserve concerns about inflation now supersede job gains.
While we discuss those implications for markets below, there is an important point we feel deserves its own section.
All the power employees hold right now – the ability to demand higher wages, better benefits, etc. – that will end with higher rates.
The Fed will raise rates until inflation comes under control.
That will only happen if it can dampen demand.
Lower demand = less of a need for jobs.
Yes, inflation could temper just from supply chain fixes. But that’s only one side of the equation and wishful thinking.
With backlogs at record levels, demand needs to decline to bring down inflation.
The Fed knows this.
And now you do.
So, if you planned on making a career move, now is the time!
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Time To Ignore Jobs
Friday’s jobs numbers fit nicely into this week as Jerome Powell testified before Congress yesterday.
He admitted, much to no one’s surprise, inflation needs to be checked
Transitory No More
For months, Fed officials believed inflation would ease as time went on.
They expected supply chain congestion to work itself out and consumer demand to fade.
Neither of those happened.
Year-over-year inflation hit 6.2%, a level not seen in three decades.
Jobs Are Fine-ish
Unemployment improved to 4.6% in October. While not as good as pre-pandemic, it’s extremely low in a historical context.
Friday’s jobs report is expected to show the unemployment rate dropping to 4.5% with average hourly earnings up 0.4%.
ADP payroll data released this morning showed the private sector added 534,000 jobs in November vs estimates of 525,000, though it’s down from the 570,000 the prior month.
Higher Rates Not Bad For Consumers
Powell effectively said taper is ending soon and higher rates are coming next year.
That’s unlikely to snap demand through the holidays.
However, it sets the stage for a spending pullback next summer from businesses and consumers.
Right now, households have insane amounts of cash sitting on the sidelines earning squat for interest.
Debt for average investors is remarkably low.
Higher rates should push stocks lower. But, they may benefit retail.
People with cash on the sidelines now aren’t likely to drop it into markets in the face of a neverending epidemic and sliding stocks.
Instead, they’re likely to realize gains on savings accounts and CDs, even if only slightly.
Some economists are already talking about the Fed pulling an early 1980’s style move and raising rates as high as 15%.
While that’s not likely, even rates as high as 3%-5% are likely to bring huge amounts of cash.
The Bottom Line: The Fed cares about inflation…now.
Expect higher interest rates next year. Our bet is the June meeting.
However, markets should start to price in the move after the first of the year.
So, don’t try to get ahead of the move until you start to see it happen.
Despite what is ‘likely’ there is plenty that could change between now and then.