Recent labor market data gave the Federal Reserve some flexibility to turn its attention to a persistent inflation problem. But now we have an oil shock to add to the picture.
While the disruption to global energy flows is a shock to the inflation side of the ledger, it could easily knock the other half of the Fed’s mandate off balance.
US central bankers, who will announce their next interest rate decision later today, face a policy dilemma: rising pricing pressures on one side, and slowing economic growth on the other.
As DataTrek’s Jessica Rabe wrote in a note this week, the recent spike in oil prices “will certainly” upend the low hire-low fire dynamic “if it persists long enough to cause recession concerns among public and private businesses.”
The ratio of job openings to unemployed workers has fallen sharply since June, dipping below 1x, meaning that there are more people looking for work than there are open positions.
At 0.9x, it’s still above the long-run average of 0.7x, she noted.
“While this ratio does not yet signal a labor market/consumer-led recession, it has come down quickly and bears watching in the months ahead, given rising oil prices and recession worries.”
The Fed playbook calls for lowering rates, if weak growth and a flagging labor market were the main problems at hand. But the Fed faces the conundrum of defending against two potential problems at once — each calling for different solutions.
Wall Street expects the central bank to hold rates steady at the conclusion of its policy meeting. But investors will also be watching for the Fed’s rate-setting projections. The market expects the Fed to cut rates at least one time before the end of the year. Will that expectation shift?
A market probability tracker published by the Federal Reserve Bank of Atlanta shows that the odds of a rate hike over the next three months are now higher than the odds of a cut — highlighting how quickly the economic picture has shifted.
Some observers foresee no cuts at all, a recognition that amid a menu of bad choices, the Fed’s strongest move might be to sit and wait — yet again.
