Are we almost there, Jerome? By


By Geoffrey Smith — This week’s Fed experience has been the parent’s road trip at its most depressing mundane: kids behind your back, boring you, pissing each other off and generally becoming more and more moodier each time you answer the question “Are we almost there yet?”

“No, son, we still have a long way to go.”

“Waaaaah! It’s hoot!! »

“Maybe, son, but whining about it won’t get us there any faster.”

For those who want to see the end of Fed tightening, the signs are becoming clearer day by day. Disinflation is spreading from the most interest-rate sensitive sectors of the economy, such as real estate, while the prices of goods – especially durable goods – weaken as bottlenecks supply chain are a thing of the past.

Second, there are increasingly clear signs that the labor market is starting to calm down. The days of two vacancies for every jobless worker are nearly over as even Amazon (NASDAQ:) halts corporate hiring, while its weaker brethren in the tech sector, Facebook owner Meta Platforms (NASDAQ:) 🙂 to Stripe and Coinbase (NASDAQ:), is laying off more and more people.

October – while still containing some ambiguities – confirmed a general slowdown: payroll gains were limited to a smaller subset of sectors, while wages increased. Overall job growth has clearly slowed in recent months: Greg Daco, chief economist at EY, noted that at 289,000, the three-month average of job gains is now at its lowest in almost two years. growth, at 4.7% year-on-year, is also the weakest since August 2021.

Moreover, base effects will soon become the friend of the dove of inflation: the rally that saw prices nearly double from $63 began in early December last year. Before the arrival of spring, statisticians will use a price of $90 as a comparison with the previous year. From a purely mechanical point of view, it is difficult to see crude prices doubling again from this level. Yet they will most likely remain at a level that keeps discretionary spending under pressure.

So surely the day when the Fed will stop climbing is approaching?

Well, yes, but.

It remains a fact that inflation regularly surprises on the upside, not only in the United States but also in Europe. Economists – including central bankers – still seem to be structurally underestimating the strength of price pressures, for reasons they have yet to clearly articulate. Cynics would say that the main cause is neither energy prices nor supply chain disruptions, but a decade of excess money creation, a hard thing for central bankers to accept given that they have to assume sole responsibility.

As long as this underestimation remains relevant, talking about a pivot will remain premature.

Second, the longer-term consequences of de-globalization must be considered. As mentioned before, a world in which an aging population reduces the supply of labor to service-oriented economies, a world in which cheap Chinese labor and energy cheap Russian are rejected for political (even legitimate) reasons, a world where money creation has outpaced productivity growth for years – this world is going to be subject to higher than expected inflation, for longer than expected, even taking into account cyclical slowdowns.

At the end of a week of a hawkish Fed and a dovish jobs report, the market still thinks interest rates still have at least 1 percentage point to rise, before plateauing in the spring. 2023, and that is unlikely to be an overly pessimistic assessment. Risks may have shifted slightly in favor of the doves with Friday’s numbers, but this remains a cycle not seen since the end of the Cold War. It’s still a long way to go, and with a lot of twists too.

Daniel K. Denny