SA Asks: Is the Fed more focused on inflation or jobs?
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While some investors have been anticipating another interest rate cut in the wake of a relatively strong jobs report, a recent uptick in the inflation rate has fanned speculation that the Federal Open Market Committee may leave rates as they are when it meets later this week.
The FOMC is expected to announce its decision on Dec. 18. Which brings us to today’s SA Asks question: is the Fed more focused on inflation or jobs?
We asked Seeking Alpha analysts Justin Purohit, Jacob Hess of MTS Insights and Manika Premsingh to weigh in on the topic.
Justin Purohit: At the July FOMC meeting, the Fed shifted its policy statement from prioritizing inflation risks to balancing both sides of its dual mandate. The focus then appeared to lean towards the labor market, and, in my view, it still does today. Fortunately for the Fed, reduced employee mobility and evolving employer-employee power dynamics help temper wage growth, while steady average monthly job gains of 175,000 to 190,000 indicate a labor market that remains healthy without overheating.
Jacob Hess: The Federal Reserve is clearly focused more on its employment mandate and has been since September when it opted for a strong 50 bps cut. As more inflation data has come in since then, there has been some concession by FOMC members that signs of disinflation slowing down might cause them to shift their attention back to prices. However, as we head into the December FOMC meeting, there is still an emphasis placed on labor market trends in the Fed’s current monetary policymaking.
Manika Premsingh: With the unemployment rate averaging at 4.15% for Q4 2024, the number remains lower than the Fed’s projection of 4.4%. This would have been less of a concern if the latest CPI inflation figure hadn’t inched up for the second consecutive month in November to 2.7%, year-over-year. Stubborn core inflation at 3.3%, year-over-year, doesn’t help, either. Inflation could well be a bigger concern for the Fed, after it already expressed some diffidence in its last FOMC statement.
Even though at 2.3% in October the headline PCE inflation was exactly at the forecast, the latest CPI inflation figure indicates it can rise, too, especially as the core PCE inflation figure for October at 2.8% was slightly higher than the target of 2.6%. This raises the odds of the Fed maintaining rates as they are.