Inflation is moderating, yet the Fed remains aggressive in policy. We attribute a reason for this to the tight labour market.
At the August Jackson Hole symposium, Fed Chair Powell said that the "labour market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers." Since then, demand has strengthened and the participation rate has tapered.
The latest average hourly earnings m/m surprised to the upside, printing at 0.6% ahead of the consensus of 0.3% and more than the previous number of 0.5%.
This is a concern because an out-of-control wage spiral is difficult to control. Therefore, the Fed needs to remain vigorous, ensuring this spiral does not occur. However, in doing so, it is more than likely that a harder recession ensues.
Implications here are that at some stage the Fed will need to pivot and pivot swiftly. The futures market is already pricing in around 50bps of cuts for H2 2023.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.