A hot labor market could see the U.S. economy avoid a slowdown or recession, forcing the Federal Reserve to crank interest rates higher than market participants anticipate. That isn’t good news for stock-market investors, warned a top Wall Street economist.
The Federal Reserve’s efforts to slow the economy and bring down inflation are often likened to landing a jumbo jet, with economists and Fed officials frequently talking of the effort to achieve a “soft landing” as opposed to a “hard landing.” A no landing scenario implies that an economic slowdown can be avoided or at least delayed, though with the risk of a later reckoning as the Fed continues tightening monetary policy.
The risk is that persistent inflation, running at a 6.5% year-over-year rate in December, takes much longer than expected to get back to the Fed’s 2% target. The main reason for that risk is a labor market running hot by almost every measure, Slok said. And if the services sector needs to fill hundreds of thousands of jobs, wage gains will threaten to make inflation sticky.
Slok said he wouldn’t be surprised to see the fed-funds rate peak around 5.5%, above the Fed’s projection of just above 5%. The fed-funds futures market has moved closer to the Fed’s projection but still sees scope for rate cuts by year-end.