With the FOMC meeting underway at the time of writing, it’s worth going through one of my favorite Fed Charts – and it is one that in my view is basically all you need to know when it comes to gauging what the Fed will do next. The main chart shows consumer and small business perceptions about the labor market. Their views are both consistent with an increasingly tight labor market. On the consumer front the view is that jobs are increasingly easy to find, and for small businesses, it’s becoming harder and harder to fill jobs. It has been a long time coming to get to these levels following the global financial crisis and the “great recession”, but now that we are here the path for the Fed is clear.
With the global economy tracking at a decent pace, this chart gives compelling justification for an ongoing and gradual normalization of monetary policy by the US Federal Reserve. This means more rate hikes and eventual balance sheet normalization (quantitative tightening). For the market, this presents risks across assets, as each additional tightening measure raises the odds of an end to the record low volatility readings we are seeing across asset classes.
Consumer and small business sentiment reflects an increasingly tight labor market, this is a tick on one part of the Fed’s dual mandate (full employment) and will lead to improved wage growth and higher inflation (the other inflation-targeting part of the Fed’s mandate).
Something to ponder – the shadow Fed Funds rate (or QE adjusted rate – reflects the impact of QE) has gone a long way since 2013, so some might say the current hiking cycle is longer and larger than usual.
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