Growth, Wages and Prices: Tough Calls

Written by: Global Thought Leadership | November 09, 2018

Courtesy of Western Asset, October 25, 2018. Source: Federal Reserve. as of August 31, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The Bottom Line

  • With the next Fed rate meeting coming up in mid-December, bond investors are focused on what the Fed might do to slow down a booming economy whose long-term staying power under current challenging conditions has yet to be tested.
  • With average hourly earnings continuing their moderately upward path and inflation remaining muted, the Federal Open Market Committee (FOMC) appears confident in both its optimistic outlook for the economy, and its ability to time pre-emptive rate hikes to ensure that the economy remains stable if wages and inflation should rise faster than expected.
  • In that light, the history of hourly earnings and inflation since 1985 sends a cautionary message, as noted by Western Asset CIO Ken Leech in his recent webcast, summarized in The Continuing Uneven Global Recovery.
  • The Fed’s track record in acting pre-emptively to control employment and prices – its  twin mandates – is arguably mixed.  Specifically, wage growth and inflation have decoupled during several periods of rapid growth, only to re-converge as recessions have followed well-intentioned rate moves.
  • Key cases are the periods before and immediately after the 2000 tech-triggered market decline and the run-up to the 2007-8 global financial crisis, and its unusually muted aftermath.
  • That could be cause for caution going into 2019, as an attempt to pre-emptively dampen inflation presumes that the Fed can know where growth rates and inflation are headed, and what interest rates it would take to dial either of them back in an orderly fashion.

 


Source: Bloomberg as of November 9, 2018, unless otherwise noted.

Definitions:

The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.

US Average Hourly Earnings, Production and Nonsupervisory Workers is calculated by the U.S. Bureau of Labor Statistics on a monthly basis.

 

Top

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.