Fed Policy
Summary 1. Friday's Q3 ECI release showed a modest slowdown in the pace of wage growth. Coupled with what we already knew about Q3 employment growth, we are continuing to see a slower—though still highly respectable and resilient—pace of gross labor income growth (~6.1% annualized
Two things are all but guaranteed for the rest of the week: 1. The Fed is going to hike 75 basis points (2.25%-2.50%) and signal that it remains vigilant about inflation. Their characterization of growth dynamics are likely to remain on the rosier side, and inflation expectations
Summary Although neither the magnitude nor composition of last week's inflation print surprised us, especially given the knock-on effects from the 'Ukraine shock', they did surprise the CPI forecasting consensus. In response, Chair Powell and the rest of the committee will likely deliver two innovations:
Tightening global financial conditions may serve to reinforce policy tightening, and the Fed should be cognizant of the risk that hikes may have a stronger-than-expected impact in this period of elevated uncertainty.
A CPI pre-read, wherein we argue the Fed should be calibrating its tightening efforts to what current conditions are indicating.
Journalists can pretty much pre-write their headlines given the spike in oil prices. Year-over-year headline inflation readings are set to make new highs, potentially breaching 8% based on the food and energy impulse from what we might call the "Putin shock" to key commodities. At
Commentators across the ideological spectrum have argued that inequality justifies a more hawkish path for monetary policy. These arguments miss the fact that interest rate policy primarily slows consumer spending and consumer price inflation by slowing down the labor market first.
We provide an update on what our in-house monetary policy framework suggests about the appropriate trajectory for monetary policy using more reliable “real-time” measures of gross labor income
To understand how the Fed is interpreting its “maximum employment” mandate in the current context, it’s worth going through Chair Powell’s remarks and Q&A for the December FOMC meeting.