Dear middle class, you do not need to be concerned about your bills going up by another $100 a month-- The Fed let us know again yesterday that it’s going to make absolutely sure that doesn’t happen by making sure that you lose your job first.
“The reports that we get from the field are that companies are very reluctant to lay people off. Generally, companies want to hold onto the workers they have because it’s been very, very hard to hire,” Powell said on Wednesday after the Fed hiked the fed funds rate another 50 basis points.
The robust demand for labor explains why the Fed has forecast the unemployment rate to rise to a peak of 4.6% in 2023 while interest rates throttle the economy; the current jobless rate stands near a half-century low of 3.7%. The critical roles of wages and consumer spending underpin the Fed’s forecast that the economy will continue to expand in 2023 by 0.5% and avoid a recession.
However, as we have noted repeatedly here in Insights, history is not on their side. No increase in unemployment anywhere close to what they’re forecasting between this year and next has ever happened without the economy falling into a recession. Ever.
The Fed emphasized yesterday that it would do more to restrain the economy than previously expected. Rates are expected to rise to 5.1% next year, officials projected, up from 4.6% when they last issued forecasts in September.
“We have more work to do,” Powell said at the news conference as he dismissed the possibility of rate cuts next year.
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I got some interesting feedback about last week’s Insights column in which I described Senator Elizabeth Warren’s book, The Two-Income Trap. Apparently, a reader took it as anti-feminist, for which I’m truly sorry, but I was simply describing the Senator’s work and how its conclusions (somewhat surprisingly) jived with our own outlook here at RG, primarily that the Fed’s action going forward is much more likely to key off of the labor market than the headline Consumer Price Index number.
CPI has taken a back seat; as the market is confirming today, it’s yesterday’s news. Powell very directly confirmed that our analysis was correct, so I’ll copy and paste an important excerpt here for anyone who missed it:
“We think any moves to position portfolios based on the Fed pivoting on interest rates anytime soon is premature, and that’s because of our view of the labor market. It still seems likely to us that the Fed will hike rates until unemployment hits 4.5%, which would equate to millions of households losing a breadwinner.”
That would be devastating, but Powell maintained that the Fed will not tolerate inflation, even if it means forcing your mom and dad into early retirement. On changing the Fed's 2% inflation target, he said, "We're not going to consider that under any circumstances." …Which is a bummer because any indication of tolerating even a small amount of inflation would send stocks and bonds both limit-up.
The Fed’s inflation target isn’t even credible anyway. De-globalization, the transition to alternative energy, and the needs to pay workers more and to shorten supply chains are all inflationary. At some point, they’ll have to raise it; as the adage goes, the only thing worse than being wrong is being wrong for a long time.
…Besides, if wages don’t force their hand to ratchet up that number, just watch-- oil prices will.
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In an odd turn for our list of most-read Insights columns this year, several of our posts from 2021 and even 2020 showed up in our top ten. Those Destined to Hang Need Not Fear the Water from May of 2021 was once again our top column this year, and Rotate, from December 2021, was number two.
I write Insights for several reasons. I think the most important one is just for people to get to know us, how we talk, and not just how we approach markets but how we approach relationships. A secondary benefit of Insights, though, is that it allows us to go on the record about certain matters so that potential clients can look back and assess how we did. Those Destined to Hang Need Not Fear the Water and Rotate were both extremely precise and served that purpose very well, so it’s gratifying that you’re still checking them out.
You Can Quote Me on That, which was all about pickleball, the Fed and Ukraine, was also a top read this year.
In Margin Call, we discussed the Treasury market and how likely Fed action would help long bonds while driving up short-term yields. Since that time, yields on thirty year Treasuries have plummeted while short-term yields have spiked dramatically.
The short but sweet Turn the Record Over rounded out our top five. Kinda still waiting for that to happen. Next year?
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Whether you’re looking for a change from your current financial institution or considering working with a financial advisor for the very first time, we’d love to talk with you, so please do keep in touch. As this financial annus horribilis comes to a close, Liz, Eymani and I thank you for your readership, trust and patronage. Here’s wishing you a holiday season filled with peace and a prosperous new year.
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