Some Good News and Some Bad News for the Fed

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, November 2, 2022

Awaiting the Federal Reserve Decision

While awaiting the Federal Reserve’s (Fed) interest rate decision, investors received a few pieces of relevant news this week that could likely be topics of conversation among Fed officials. Most expect the Fed to aggressively hike the federal funds target rate for the fourth consecutive time at this November meeting so the real interesting part will be the press conference after the Federal Open Market Committee (FOMC) announces the decision. A tight labor market amid signs of easing inflation will likely be discussion topics for the foreseeable future.

Some Good News and Some Bad News

We’ve previously highlighted the areas where we see easing pricing pressures. Rents in some areas, shipping costs, and used car prices have come down. The point of contention for some members of the FOMC is if the deceleration is convincing or not.

Recently, investors received some good news about prices. The Institute for Supply Management issued a report on October manufacturing activity, which is still expanding but has consistently decelerated since March 2021 as global economies slow down. Imports are still growing, in contrast to exports which have contracted for three consecutive months. Order backlogs fell the lowest since mid-2020 when economic activity ground to a halt. Supply chains have improved dramatically, releasing some of the inflationary pressures of this year. But the highlight of the report is that input prices fell from a month ago, the first month-to-month decrease since May 2020, and should add convincing evidence for the Federal Reserve that inflation is past peak. (Index levels below 50 imply contraction and above 50 imply expansion.)

Two main themes are developing from this report. First, international economies are under greater economic stress than the U.S. and second, prices are finally declining after an extended period of extreme inflationary pressures.

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Investors also had some bad news to digest this week. According to the September Job Openings and Labor Turnover Survey (JOLTS), the job market is still tight as firms struggle to find workers. The labor market could slowly loosen as workers re-enter the workforce. Quit rates were unchanged in September and stayed below the all-time highs earlier this year. However, the number of job openings increased up to 10.7 million but below the high of 11.9 million in March. Quit rates are a more stable metric than openings and give a snapshot into the optimism of individuals as they move from one job to another or take a modified “gap year” off from employment.

Elevated inflation pressures should lower the quit rates in the coming months as individuals become less inclined to quit their jobs. The Federal Reserve will likely continue hiking interest rates to slow aggregate demand and attempt to bring demand and supply back into balance. Rising unemployment should fix some of the imbalances between the number of individuals looking for work and firms with open positions. But nonetheless, the imbalance in the labor market could likely be a hot topic in upcoming Fed press conferences.

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In the near term, the Federal Reserve is concerned about the tightness of the labor market and how that might impact the inflationary environment. However, investors are seeing more evidence that inflation is easing and in some cases, prices are outright declining. Nagging inflation, a tight labor market, and an aggressive Federal Reserve puts the economy on unsure footing for 2023. A silver lining is markets may have possibly priced in much of the near-term recession risks.


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