Kiss the Fed-Pivot Goodbye

August 9, 2022  |  Michael Reilly

Last week’s labor market report gave the Fed a giant green light to continue its aggressive assault on inflation.

So you can just forget the Fed pivot anytime soon. 

That means tighter conditions and further demand destruction…

Contingent to this week’s CPI report, last week’s labor market data implies a more aggressive Fed going forward – especially as they now profess themselves as ”data-dependent.”

According to the Bureau of Labor Statistics (the group responsible for keeping score), the U.S. economy added an astonishing 528,000 jobs in July.

For the record, that’s more than double the number economists had predicted! 

Why do investors continue to listen to economists when they swing and miss so badly? 

It’s a mystery. No bias here! 

Back to the data… it’s a “good news is bad news” scenario.

The increase in employment is a milestone for the U.S. economy, as employment is back to pre-pandemic levels.

In February 2020 – the last month before the COVID-19 pandemic tipped the U.S. economy into recession – there were 152,504 million people employed in the U.S. And as of July 2022, the U.S. economy has 152,536 million people employed.

Here’s where things get interesting… the full recovery in the labor market comes amid fears of a recession at a time the Federal Reserve is aggressively raising interest rates to reel in inflation, which continues to run at 40-year highs.

From the Fed’s perspective, the unexpected acceleration in non-farm payroll growth in July, along with the further decline in the unemployment rate and a pick-up in wage pressure, puts the proverbial kibosh on claims that the economy is teetering on the brink of recession.

No, I don’t want to debate the definition of recession – we can go on all day about two consecutive quarters of falling GDP, etc. You won’t get an argument from me…

What matters right now is understanding that if the Fed is, in fact, going to be “data-dependent” in their decision-making as they claim they are, then investors have to prepare for what’s to come.

The data certainly suggests a more aggressive Fed with higher rates and tightening of liquidity (the lifeblood of markets).

And if the Fed was considering anything less than a 0.75% raise in interest rates at its September meeting, last week’s labor data put an end to that as well.

This would mark the third-straight meeting where the central bank raised rates by 0.75%. 

Be aware that the more aggressive the Fed remains in pushing up rates to combat stubborn inflation, the more unrealistic the idea of a soft landing becomes.

The Fed has every intention of slowing consumer demand. The only question is, will it come to a screeching halt?

Until next time, we’ll keep watching, and always remember to invest wisely…

P.S. To find out how Rowe Wealth can help you profit through whatever the market serves up next, schedule a free 1-hour consultation with us now.

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