Some labor market indicators suggest that Federal Reserve policymakers have already fallen behind in raising interest rates and that supply shocks to the US economy should dissipate quickly so that officials “do not don’t be too late, ”says Deutsche Bank strategist Francis. Yared.
These shocks impact both US inflation and the labor market – where there are not enough workers for everyone and where wage increases are needed to attract or motivate them while more Americans are quitting their jobs, said Yared, Deutsche Bank’s global head of rate research. in an interview with MarketWatch on Thursday.
He cited the so-called dropout rates, which have remained near record levels, as a sign that policymakers are lagging behind in action.
Officials are unlikely to raise rates until next year, given the need to cut the Fed’s $ 120 billion in monthly bond purchases first, and their credibility remains largely intact judging by the financial markets whose price is fixed to keep inflation under control. Stock markets continued to recover on Thursday, with the Dow Jones DJIA index,
closing at over 330 points, while breakevens remained stable and parts of the Treasury curve continued to steepen as the 10-year Treasury yield TMUBMUSD10Y,
reached its highest level since June.
Nonetheless, investors are increasingly worried about the likelihood of a longer period of price hikes than previously imagined, and they will focus on the release of the price index next Wednesday. consumption for September.
Read: The sudden realization that inflation could persist begins to be felt among many U.S. investors
“I am happy to have an open mind about how quickly supply shocks will dissipate,” Yared said by phone from London. “But what I mean is that there is absolutely a risk that the Fed is lagging behind. It would take a lot of people back to work quickly enough for that not to happen.
“Obviously if you are late you have to walk faster first,” he said. “But where the end point is would still be a matter of debate.”
Yared’s comments come at a time when more investors and analysts are becoming sensitive to the risks of a stagflation-like outcome in the United States, although some indicators suggest that the economy may currently be growing in the United States. above its potential. Year-over-year consumer price readings for May, June, July and August have reached a surprisingly high level of 5% or more, and there is little indication that inflationary pressures will subside anytime soon given the supply chain bottlenecks that have not eased.
Meanwhile, the US labor market “behaves as if it were full employment” even though the current unemployment rate of 5.2% for August remains above pre-pandemic levels, says Yared . Recent data shows that nearly 4 million Americans quit their jobs in July, with a quit rate of 2.7% for a second consecutive month.
See: Inflation has already cleared the hurdle to hike rates, but job criteria are not yet met: Fed’s Mester
Recent trends in commercial and industrial loans, in addition to mortgages, derived from the survey of the Fed’s senior loan officers, indicate a US economy that is already growing above its potential with a growth rate below. The underlying GDP of 3-4%, Yared said. He based this observation on calculations performed by Haver Analytics that capture lending standards to provide a measure of credit supply, from 1990 until the last loan officer survey released in July.
Despite being two months old, the data “gives you a sense of the type of environment you find yourself in when you face other factors that may be temporary and distort business.” , Yared said. “My best guess is that the willingness of banks to lend will remain at high levels. Data is something less precise for estimating quarter-over-quarter growth, but potentially more precise for understanding underlying trends.
Other indicators – such as core inflation above target and rising wages, as well as quit rates – all point to the US economy being more advanced than many people think. , he said. So “the question is not whether or not Fed officials should cut back or not, but whether they should be above neutrality” with interest rates – or a level high enough to support l economy, while keeping inflation stable.