January Payroll Preview
FOMC first thoughts, labor demand, the slack conundrum and Great Reallocation
Policy Humility
At the December FOMC meeting, the summary of economic projections had a low dispersion around an increase of 50bp in the terminal policy rate, despite softer inflation data between the September and December meetings. The market saw through the FOMC’s apparent use of the ‘DOTS’ as a form of forward guidance. In the FOMC statement and at today’s press conference, Chairman Powell acknowledged that disinflation is well underway. Notably, he did not validate a thesis we thought was nonsensical, that looser financial conditions (not stock prices, the TIPS curve) would require additional hikes even as the data improved. Additionally, when asked about the December FOMC terminal rates forecast, his response indicated the Committee is not on a preordained path to 5+%. While we disagree with his characterization of the labor market as very tight and that services less rent of shelter inflation has not started to decline, we thought he returned to his pledge early in his Chairmanship to be humble with respect to Fed models for the optimal interest or unemployment rates.
One of our former Barclays colleagues, Mike Gapen, now BAML’s US economist, said in Bloomberg interview, ‘there is no getting around the dovish signal a reduction in the pace of rate hikes to 25bp implies’. We continue to believe there is a reasonably high probability that today’s hike was the last of the cycle, but our forecast depends on data rendering Powell’s characterization of the labor market as tight, null and void. Tuesday’s 4Q22 employment cost index strengthened our case, Wednesday’s December job openings survey, not so much. Ahead of Friday’s January employment report and annual establishment survey benchmark revision here our broad thoughts about the state of the labor market. Spoiler alert, in our model of the world, price is the most important variable. Wage growth didn’t just start slowing in 4Q, the trend began in 2Q22. In other words, the labor market cannot be tight if the price is falling persistently.