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by opportune
1263 days ago
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The Fed has a dual mandate. They do not actually want to raise the unemployment rate by itself, only insofar as with the very strong unemployment rates now, it gives them leeway to potentially increase it as they address their other mandate of taming inflation. Inflation in the US, contrary to popular belief, is already almost solved. Since July the MoM inflation per the FRED CPI rate is annualized at like 4%. Once the Fed feels like they have it under control they would not want to continue raising it just to increase unemployment. |
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Rate of CPI change is declining on a MoM basis due to one time fiscal headwinds/supply normalization. The demand side has not been addressed at all, with nominal GDP growth close to 10% YoY and the tightest labor market in history along very high wage growth numbers.
If the Fed doesn’t raise unemployment before loosening policy, CPI will rebound due to the level of labor market tightness and wage growth.
It’s possible the Fed will use declining headline CPI to justify pivoting prior to rise in unemployment, but this will almost certainly turn out to be a mistake and require even higher rates a year or two out.
If the Fed pivots before actually triggering a solid softening in the economy, all assets will rally and labor market will retighten.
They made exactly this mistake many times in the 70s and 80s. The only way out at this point is to keep policy tight until a recession event kicks off