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Thoughts From Last Week
This week’s FOMC meeting will be critical, with its revised dot plot set to clarify if market sentiment remains more dovish than actual Fed communications.
This year, markets and the Federal Reserve have repeatedly danced the tango, with markets moving forward in anticipation of early interest rate cuts and then stepping back to realign with "Fedspeak" on inflation and the labor market. As the year draws to a close, the dance has resumed.
Last week’s labor data painted a nuanced picture. While job openings fell by more than expected, to 8.7 million, non-farm payrolls rose by 199k, bringing the unemployment rate down to 3.7%. However, this increase in payrolls was anticipated, given the return of auto union workers to the workforce. Moreover, as shown in the chart of the week, wage growth declined to 4% alongside the quits rate, which has softened gradually from its April 2022 peak.
While current wage growth is above the Fed’s target level, cumulative real wage growth since the end of the pandemic recession is still negative. As a result, wage pressure seems more in response to past inflation than an indicator of future inflation. However, it is still crucial to acknowledge that despite some recent moderation, the labor market is still very strong, and since the quits rate has stabilized over the last four months, any further moderation in wage growth will likely be gradual.
Currently, the futures market anticipates between four and five rate cuts in 2024, starting as early as 1Q. However, unless the labor market weakens significantly and inflation falls back promptly to the Fed's 2% target, the Fed may opt for a more measured pace of easing than the market expects. This week’s FOMC meeting will be critical, with its revised dot plot set to clarify if market sentiment remains more dovish than actual Fed communications.