Weekly Review & Outlook: November 6, 2023

“I will say that we’re not confident at this time that we’ve reached such a stance. We’re not confident that we haven’t, we’re not confident that we have.” – Jay Powell

Topics this week are the Fed’s interest rate decision, my perspective on policy path and a related check-in on the most recent jobs data. The presentation includes a few more supporting graphics than typical.

As expected the FOMC held the target rate at an upper bound of 5.5% (November 1). Forward meetings will remain live but, in my opinion, a realistic baseline is to assume the terminal rate has been reached. With commodity and housing services inflation having fallen several quarters earlier, the closely watched non-housing services inflation appears to finally be following.

Powell commented on employment cost inflation in the implementation press conference stating, “the broad range of wage increases have really come down significantly over the course of the last 18 months to a level where they’re substantially closer to that level that would be consistent with 2 percent inflation over time, making standard assumptions about productivity over time. So it’s much closer than it was. And that’s true of the ECI, which is the one that we got this week, it’s true of average hourly earnings and compensation per hour too. So, and all of them are kind of saying that, which is great. And you have to look at a group of them because any one of them can be idiosyncratic in any given reading. So that’s what you see. And so what you saw with the ECI reading was if you look back a couple, it comes out four times a year, if you look back a couple of quarters, you’ll see it was much higher and it came down substantially in June, and then September reading was more or less at the same level as the June reading, so in a way, it’s just validating that decline.”

In addition to the referenced ECI, year over year unit labor cost calculated by BLS (November 2, red line in nearby chart) is now below the Fed inflation target rate for the first time since 2Q21. This measure is helpful to the argument that non-housing services inflation is no longer “sticky” to the elevated post-lockdown 6% to 8% range.

Many measures show monetary policy is indeed restrictive and some, contrary to conventional wisdom, may already be indicative as overly restrictive. With market based expectations for a Fed rate cut in June 2024 and lagging impacts of monetary policy still pending, the possibility of earlier rate cuts will likely increase. Real rates are increasing above 2% and calculations such as the Taylor Rule prescribe a lower Fed Funds rate today.

Finishing with the October Employment Situation report (November 3), BLS calculated 150k net new jobs in the month with the unemployment rate increasing to 3.9%. The August number was revised lower by -62k after a positive 40k 1st revision. September totals were also revised lower. Manufacturing fell -35k with the auto strike likely contributing.  Perma-bears will not be commenting sarcastically about seasonal adjustments as NSA jobs totals were much higher than seasonally adjusted figures.