The Fed is watching the jobs report closely
The Fed has already raised rates twice this year, and it’s looking for two more.
The August jobs report is the last jobs report that will be released before the Fed meets for its September FOMC meeting. The Fed is widely expected to raise the interest rate by one-quarter of a percentage point.
Inflation and interest rates
Higher inflation (TIP) requires higher interest rates (IEF) to keep rising prices in check. A wrong choice by the Fed could trigger a recession or lead to the economy overheating—not desirable outcomes for a healthy economy. As we highlighted in Trade War Is Still Investors’ Top Concern: Should You Be Worried? quantitative tightening by the Fed and other central banks was fund managers’ second-largest concern in August.
Jobs report and the Fed
While the unemployment rate has already reached a level that could signal potential overheating, wage growth hasn’t kept the pace with the overall job market scenario. Wage growth isn’t providing the Fed with much of a reason to be more aggressive on hikes.
In his much-anticipated speech at the annual meeting of central bankers in Jackson Hole, Wyoming, Fed Chair Jerome Powell said that the Fed is committed to gradually raising interest rates (TLT) because the US (SPY) (IVV) economy remains strong. Powell suggested that there are no signs of inflation rising above 2% and that “there does not seem to be an elevated risk of overheating,” which would undermine the need for aggressive tightening.
Until anything out of the ordinary happens, such as wage growth overshooting expectations by a wide margin, the Fed is expected to raise the interest rate twice more this year.