Employment First = Rates on Hold?

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 20211129 COTD x 3 Employment First = Rates on Hold - chart website

Source: Unigestion, BLS, Bloomberg as of 31 October 2021.

Change with continuity. This may have been the message sent by the Fed to financial markets recently following the reappointment of J. Powell as Fed Chairman. This is primarily evidenced by the introduction of AIT (Average Inflation Targeting), which tolerates inflation durably above its long-term target and thus prioritises employment and the output gap over inflation in the Fed’s reaction function, a reflection of its “dual mandate”.

We see “Employment First” as the mantra of the Fed’s AIT version. The various white papers presented at the last Jackson Hole meeting, focusing on the labour market and the references to “full employment” as a precondition for raising rates at several Fed conferences, illustrate this point well. Our chart shows the extent to which the change in the participation rate and the evolution of demographics in the US affect the labour force dynamic. Combined with the post-Covid effects, it appears that sustained higher GDP growth is needed to significantly increase the employable population.

Moreover, the recent study by the San Francisco Fed highlights the extent to which disparities between sectors and regions have grown after Covid. These shifts in sensitivity between activity and employment could delay full employment and the start of the rate hike cycle, especially if headline and core inflation begin to fall.


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