The Fed can't give the stock market what it wants because its aggressive rate hikes have made little progress cooling the job market
- The Federal Reserve's tightening regime is having little impact in slowing down the job market.
- That means the Fed can't give the stock market what it wants most: clarity in future rate hike plans, according to DataTrek.
- "Chair Powell is not really in any position to provide that [clarity] just yet," DataTrek said.
The stock market wants clarity from the Federal Reserve's future interest rate hiking plans, but investors aren't going to get that anytime soon, according to DataTrek Research co-founder Nicholas Colas.
That's because despite the Fed's cadence of aggressive interest rate hikes so far this year, it has had little to no impact in cooling down the job market, which in effect means that wage inflation is likely to stay elevated.
That's important because wage inflation is seen as one of the main drivers behind overall inflation, which Fed Chair Jerome Powell is desperately seeking to tame via interest rate hikes and a reduction in its near-$9 trillion balance sheet.
"Markets want clarity on where the Fed will at least pause the current rate hike cycle, but Chair Powell is not really in any position to provide that just yet. For every sign the US economy is slowing, there are others that say labor market conditions remain strong," Colas said.
More than 300 basis points in interest rate hikes so far this year have sent mortgage rates soaring to levels not seen in about two decades, and that has crushed the housing market, with both prices sales volume starting to decline. Falling commodity prices and a deceleration in retail sales also signal that demand is not on as strong footing as it had been prior to 2022.
But at the same time, recent JOLTS data showed job vacancies surging in September by nearly half a million to 10.7 million. That means there are still 5 million more job openings than unemployed workers. Prior to the pandemic, there were just 1.3 million more job openings than unemployed workers.
Additionally, DataTrek's "take this job and shove it" indicator, which measures quit rates among employees, has been more than 11 percentage points above its pre-pandemic levels. That means employees still feel confident in their job switching capabilities, and they're likely to pick up a higher salary when they change.
"The FOMC's monetary policy decisions have had little impact on the US labor market to date, and it remains much tighter than they'd like to see," Colas said.
This increases the likelihood that Powell will keep his cards close to his chest during his upcoming policy decision and subsequent speech, as he'd like to leave optionality into the Fed's December rate hike decision. Between then and now, there will be two CPI reports and two jobs reports released, which should allow the Fed to make a truly data dependent decision.
"As much as Powell may be trying to emulate Paul Volcker, he may have to borrow from Alan Greenspan's playbook and reveal as little as possible about where he sees rates going over the near term," Colas concluded.
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