Focus of the Fed on the Job Market

In a speech last Wednesday (November 30) at the Brookings Institution in Washington, DC, Jerome Powell, the president of the Federal Reserve (Fed), hinted that the next FOMC meeting on December 14 will decide to raise the US basic interest rate by a smaller amount.

After four meetings in a row with increases of 75 basis points, people now expect an increase of only 50 basis points this time. In March of that year, the basic rate was almost zero, but by the end of the year, it was between 4.25 and 4.5% per annum.

On the other hand, Powell said that there is still a lot of inflation in the US. He said that one estimate said that inflation in personal consumer spending was 6% per year from October of last year to October of the next year.

For inflation to stay at 2% a year, interest rates will have to be high enough to make borrowing more expensive. He said that there is still more work for the Fed to do, which suggests that interest rates will go up even more in 2023.

He said that the goal of monetary tightening is to slow demand growth relative to aggregate supply. To do this, the US economy will have to grow slower than usual for a long time. Even though the money supply had been tightened and growth had slowed down this year, he didn't see any clear signs that inflation was going down.

In his speech, Powell talked about both inflation and the job market. When he talked about the three main parts of the inflation rate—goods, housing, and services other than housing—it was clear why (Figure 1).

Core inflation for goods went down from high levels over the course of the year, but prices for housing services kept going up at a 7.1% rate. Powell, however, pointed out that the rate of price increases for new leases has slowed down a lot since the middle of the year.

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If the Federal Reserve doesn't do this, the U.S. economy and S&P 500 will have a hard landing.

The biggest reason to be hopeful that a recession caused by the Federal Reserve can be avoided next year was just taken away. In September and October, hourly pay went up, and in November, it went up even more. This pushed wage growth far above the range that is in line with the Fed's 2% inflation target. Nearly everyone agrees that the Fed needs to raise its inflation target, at least in practice, if the U.S. economy is to avoid a hard landing and a bigger drop for the S&P 500. The Fed might be willing to do this, but the economy would still need to cool down more before they stop raising interest rates. "The 2% inflation target is a lot more flexible than the Fed lets on," RSM chief economist Joe Brusuelas told IBD. "I don't think there's any constituency out there for the bloodletting that would be necessary." Brusuelas thinks that for inflation to return to 2%, the Fed would have to raise unemployment to 6.7%. But most of the way to 3% inflation ...

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