Fuel for the Interest Rate Fire
In last week’s update I suggested the Federal Reserve will need to increase interest rates more than most investors currently expect. (read it here)
Last Friday’s employment report came in HOT and suggests what I have been writing here for over two years, that inflation was not, and is not, transitory and, for the Fed to get in front of the Real Return Illusion™, they will need to increase interest rates faster and higher than they have telegraphed.
Labor costs are a large input to the rate of inflation and last Friday’s report basically gave the Fed the free pass they needed to start the climb up in interest rates before it is too late, if it isn’t already. (Remember, investments in Corporate America have traditionally been a good inflation hedge as they simply pass their cost increase on to us as consumers. It doesn’t have to be just a cost increase, often times it is a reduced weight of the packaged product, or the air pocket in my tube of toothpaste)
Here are a few highlights of that free pass:
- Total nonfarm payroll employment rose to 431,000 in March. Positive news for the economy that February job estimates were revised higher, pushing the three-month average gain to 562,000.
- The labor market is tight as unemployment fell a tick to 3.6%.
- As expected, job gains were large in leisure and hospitality, as well as retail and manufacturing.
- Average hourly earnings grew 5.6% from a year ago, not quite keeping up with the rate of inflation.
- Labor conditions give the Federal Reserve plenty of leeway for a 50-basis point hike in both May and June meetings
(Source: LPL Financial 4/1/2022)
I will take a deeper dive into what this means to our client families’ asset allocation and investment positions in this month’s update of The Seven Signs of a Changing Economy. Until then, I’m interested in your thoughts, comments and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.