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US: Strengthening labor market, tight monetary policy

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The rate hike facts and timing indicated by the announced Fed minutes make the details of the employment report more important. The December employment report includes expectations that non-farm payrolls will be realized as 433K and the unemployment rate will fall to 4.1%. In the report in November, we saw that the unemployment rate fell to 4.2%, the lowest levels since the pandemic. At the same time, of course, it will be necessary to pay attention to the wage data in the report. In terms of inflation indicators, it is one of the details that the Fed should address, and maximum employment should also be evaluated in terms of inflation. Average hourly earnings are expected to rise 0.4%, pointing to an increase of 4.2% year-on-year. Inflation – wage – inflation spiral is a subject to watch for the Fed, so the headline will draw more attention than the employment detail.

 

We can say that since the Fed’s possibility of increasing interest rates in March strengthened, they kept the inflation phenomenon in the foreground and evaluated economic growth in a healthy way despite the global Covid risks. The following detail is important in the minutes: “Most of the participants decided that if the pace of improvement in the recent labor market continues, the interest rate hike conditions can be met in a relatively short time.” Market participants are pricing in the first rate hike for March, which means the central bank could start reducing its balance sheet in 1Q22. The central bank’s balance sheet currently includes approximately $8.3 trillion in Treasury and mortgage-backed securities. It is possible that the business will continue at an aggressive level as the rate hike creates the real tightening conditions, and if the improvement in employment is to continue within the projections, it is very possible that the Fed will give priority to the problem inflation.

 

A stronger labor market will highlight tight policy conditions and expectations will be priced more strongly. Wage data showing that employment and inflation are intertwined, on the other hand, will weight tightening expectations if these signals are received. The Fed can make more moves in monetary policy.

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