The knee-jerk assumption all weekend was that a Russian invasion of Ukraine--a breakout of war, basically--would have to keep the Fed from tightening as much as expected. Certainly it rules out a half-point hike next month, right?
But here is another example of how this time is different from 2010-2019.
Back then, growth was so weak that any adverse shock would immediately recalibrate the Fed's tightening. Take 2015, when U.S. GDP slowed from 3% in the first quarter to 2% to 1% to 0.6% in the fourth quarter, as the Chinese economy stalled and its stock market bubble popped. The Fed had still not been able to hike rates since the 2007-09 financial crisis, despite saying since March of 2014 it was planning to do so. It finally did one quarter-point hike in December of 2015--and couldn't pull off the next one for an entire year after that.
Contrast that with our situation today, where we're coming off a 6.9% growth quarter for GDP (and nearly a 6% growth year). Our prime-age (25-to-54 year-old) labor force participation rate is 82% as of last month--actually much higher than the 80.9% reading from the Fed's first rate hike last cycle, in 2015! Our economy is much "hotter," thanks to $10 trillion in Fed and fiscal stimulus, and that's fueling both inflation and wage gains.
We are in fact facing down "the most overheated [labor market] in postwar U.S. history," wrote Goldman economists the other day. Quite simply, the number of job openings, or jobs wanted, far outnumbers the available workers--by 4.6 million, according to their figures. That is what's driving wage growth, which they expect to be running at 5% through the end of this year.
The "problem" with surging wages is that worker productivity is only running at a roughly 2% pace. That means businesses have to pay 3% more for the same amount of work to get done as last year. "If sustained, such a pace would make it hard, if not impossible, for PCE inflation to return to the Fed's target," Goldman warns. If workers have more to spend, it means they won't push back as hard against price hikes--and so the inflationary pressures continue.
Wages (and rents) are some of the biggest components of inflation, and they tend to be stickier than food and energy. But food and energy are big psychological drivers of inflationary expectations. And in that regard, the upward pressure on oil prices from Russia's incursion into Ukraine will only make matters worse in the near term. It's a hawkish development heading into the Fed's March decision.
And today's markets hardly suggest the economic disruption from Russia's warmongering--which would theoretically keep the Fed on the sidelines--will even be that large. The S&P 500 and the Nasdaq turned positive less than thirty minutes into the market open. And Fed governor Michelle Bowman yesterday in a speech indicated she was still open to a half-point rate hike next month, if needed.
In short, the landscape may not have changed nearly as much in the past 24 hours for the Fed as everyone seems to assume.
See you at 1 p.m!