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.
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.