EDITOR NOTE: This is related to another post we curated on the matter of inflation and employment. With the CPI coming in lower than expected, and with the recovery in employment seeing sluggish growth--the “real” unemployment figure is 10%--then according to estimates explained below, the Federal Reserve will likely keep rate hikes on interest rates at bay until the US sees “monthly” job growth near 500,000 each month. Until then, monetary and fiscal policy will remain aggressive toward achieving this goal. That’s a few years of rising asset prices, especially in the stock market. It’ll also cause the economy to boil at an exceedingly high temperature. It also means that for all that upside, the value of your dollar--your purchasing power--may lose a negatively-equivalent amount. Unless you’re willing to risk stashing your money in a bubbling stock market, your cash is losing its value fast. Stay diversified, but be prudent enough to allocate a portion of your funds into sound money--non-CUSIP gold and silver--for when the stock market bubble bursts, the value of your cash will end up a smaller fraction of what it is today.
Did Powell give everyone the green light to just keep buying stocks for the next two years?
Just hours after the latest CPI number came in lower than expected, with core inflation printing unchanged, and sparking a 10Y Treasury short squeeze which sent yields sharply lower, the Fed’s Powell then said that we will probably see an increase in inflation readings in coming months... but “that won’t mean much.” So, as Rabo's Michael Every says "getting hotter – but please let’s focus on the colder parts."
But here is the punchline: Powell explained that the latest 6.3% unemployment rate is not indicative of the economic reality, and underlined that the US economy is 10 million jobs down from where it was a year ago.
So, as Every notes, to replace all these lost workers by end-2022 - when consensus expects the first rate to take place - and accounting for natural labor-market growth, means we will need an average payrolls figure of over 500,00 every month through to next December.
As the Rabo strategist notes, "that’s an awful lot of heating up."
And since it is virtually assured that the US economy won't be adding half a million people per month for a long time, it is safe to assume that the Fed's rate hikes - as per Powell's guidance - have been put on indefinite hold.
Which is why Every concludes that "markets will continue to do all the heating for the labor market, and very happily. Like a microwave meal, we are overheating some parts and leaving others cold: no central-bank rhetoric is capable of stirring things - is the government?"
Originally posted on ZeroHedge