Thread by @RickRieder

Earlier this week the @federalreserve raised #policy rates at an extraordinary 75 basis point increment (its fourth time doing so this year), in an attempt to moderate excessively high levels of #inflation.

Still, if the central bankers were hoping to see signs of slowing in the persistently solid #LaborMarkets, as an indicator that policies were slowing growth and in turn #inflation, they may be somewhat disheartened by today’s data.

Indeed, nonfarm #payrolls increased by 261k jobs in Oct, with private employment rising an average of 262k/month over the past three months, which does not yet imply that the slowing that policymakers believe we’ll need to see to tame #inflation has arrived.

Additionally, while the #unemployment rate edged higher to 3.7%; absent signs of deterioration in initial and continuing claims for unemployment insurance, which we have not seen yet, we believe the unemployment figure will remain in its recent range.

Lastly, on #wages we also witnessed only modest signs of slowing, with average hourly #earnings printing at a 0.37% gain month-over-month and a 4.73% gain year-over-year.

Remarkably, U.S. nonfarm unit #labor costs have spiked higher to in excess of 9% year-over-year, a rate of #growth not seen since the early-1980s.

We are entering an incredible period of time for the #economy and how the #Fed reacts to it. The Fed has said that it might be willing to #overtighten, and then “we could then use our tools strongly to support the economy.” That is an incredible development.

The fact is that the 2-Year #UST #yield is currently at 4.74%, a 155-basis point (bps) increase from its three-month trough (8/15), and up 421 bps since the start of the pandemic (3/11/2020).

And the 10-Year #UST #yield is currently at 4.17%, a 140 bps increase from its three-month trough (8/08), and up 329 bps since the start of the pandemic.

Thus, as the #Fed continues to raise policy rates into more restrictive territory, those sectors of the #economy that are most #InterestRateSensitive will respond quickest and most dramatically by slowing growth, or contracting.

And it is well known that #housing is one of the most rate-sensitive sectors. So, despite the strength in #ShelterInflation, based on what is happening “on the ground,” we expect it to slow over the next 12 months.

Indeed, #housing’s economic influence cannot be overstated. For one, higher house prices have created positive #WealthEffects, especially for lower #income cohorts, but apart from wealth effects, housing also has an outsized influence on employment.

About nine jobs are indirectly created for every direct #RealEstate job, one of the highest #employment multipliers of any sector.

Over time, the #Fed should endeavor to keep policy in the fairway, avoid the extremes, and allow an incredibly dynamic U.S. #economy to re-calibrate around an appropriately stable policy stance helping to prevent excesses in either direction.

Yet over the last decade, a period essentially beginning when the job losses of the #GFC had been fully recovered, the #Fed’s policy has either held rates at or near the zero-lower bound (0.50% or lower) or changed the policy rate at 65 of their 80 meetings.

Add in #BalanceSheet adjustments up and down, and #policy has either been in constant motion or living near the extremes, so in order to minimize the #risk of #overtightening, we would advise a more stable approach to policy going forward.