Fed - Winning on Unemployment. Price Stability?
Macro Perspective: Mon 11 Oct 21
The jobs report came in on Friday. The payroll number was weaker than expected - that number gets a lot of attention - and with that, there was some debate over whether or not it would dissuade the Fed from "beginning the end" of QE, at their November meeting.
There should be no debate, the unemployment rate is now below 5% and wage growth came in last month at an annual run rate of over 7%. Both the August and July numbers for "jobs added" were revised UP, whilst if we look at the jobs report from ADP on Wednesday, the number was hot. With that, by this time next month, we'll probably find this payroll number reported today will have been revised higher too.
Bottom line: The Fed is managing against a mandate of full employment and price stability. They've nearly won the battle on employment and they are losing the battle on price stability. So, not only is it time to end emergency level policies, they should be farther along than they are in the process.
As we've discussed throughout the year, the Fed has positioned themselves to be behind the curve on inflation, which means they will be chasing it...and that means inflation will likely run hotter, maybe much hotter through next year.
On that note, third quarter earnings will kick into gear this week, when we hear from the big banks. We've heard from 21 S&P 500 companies, and most are talking about; inflation, labor costs, supply chain disruptions, freight costs, commodity costs and they're talking about covid costs.
As we've discussed, while the supply chain bottlenecks will clear at some point, much of these costs are sticky, particularly labor and commodity costs.
We can expect the conversation surrounding these earnings calls to turn to, "passing along costs." Are companies successfully passing these costs along to consumers? The answer seems to be yes.
That means wage inflation will have to keep pace with these rising costs (unlikely), or the quality of life goes down.