The latest jobs report has sent shockwaves through the kingdom of disinflation heaven, challenging the belief that inflation would simply fade away without any negative effects on the economy. For months, the Fed has been praised for its supposedly immaculate management of the economy, with promises of lower inflation, interest rates, and unemployment rates. But it seems like the reality is starting to set in.
The bond market has been particularly unforgiving, with yields on ten-year Treasuries rising significantly in recent months. This movement contradicts the narrative that the Fed had already overtightened and would need to reverse its course. Many analysts were puzzled by this shift, as it seemed to go against their forecasts of a soft-landing and immaculate disinflation. It appears that the Fed’s failure to comply with the heavenly state of lower rates and inflation is hindering the economic eschaton.
Furthermore, the September jobs report has only added to the doubt surrounding the soft-landing theory. The economy added 336,000 jobs, double what Wall Street had projected, and revisions to previous months increased employment even further. These figures demonstrate that Wall Street’s analysts have consistently underestimated the strength of the labor market, leading to underestimations of inflation and higher rates.
Some analysts are still dismissive of these numbers, attributing them to temporary blips in the downward trend of the job market. However, it may be time to reevaluate assumptions about inflation and adjust economic conditions accordingly. The recent experience of high inflation has proven that it is not a thing of the past, especially considering factors such as war, immigration, and the green-energy transition that contribute to inflationary pressures.
One possible explanation for the rise in bond yields is the belief that the Fed is not serious about fighting inflation. The market may be pricing in higher inflation and higher yields in response. Additionally, the surge in hiring and job openings suggests that the market expects higher growth next year, making a Fed rate cut unnecessary.
Despite these circumstances, some argue that the market is actually underestimating the likelihood of a Fed rate hike. The data shows a more resilient economy than previously thought, with upward revisions to job numbers and GDP growth. If the Fed truly believes in being data-dependent, it should consider increasing its rate target. At the very least, it should follow its own projections and raise rates one more time before the year ends.
It remains to be seen what the Fed will do next, as its actions can be unpredictable. As the famous slogan goes, “Don’t let them immanentize the eschaton.” In other words, let’s not pretend that we have extraordinary insight or knowledge to transcend the disorder of the world. We must be realistic about the challenges and uncertainties we face in the economic future.