Typically, this late in the business cycle businesses are trying to squeeze the last drops out of profits to maintain revenues and keep stock prices up. This is usually achieved by targeting labor as a cost, and either performing job realignments (layoffs) or cutting pay (if management has that leverage). In the current economic environment, that is not possible. Unemployment numbers are so low, even older workers (those over 50) are being lured back into the job market. In addition, in order to just maintain the current staffing, incentives and higher pay is required.
This is the situation the new Federal Reserve chairman, Jerome Powell, is facing. Low unemployment and higher wages are behaving like a small-scale wage-price spiral. What appears like the beginning of an inflationary period has the Fed considering a minimum of four rate hikes this year (one more than the previously anticipated three rate hikes). While the Fed has struck a cautionary tone, the debate rages on throughout the business media regarding the economy, the bond market, and inflation.
An article by Ben Casselman in the New York Times stated that, while the economy is going up (up, up), there are plenty of things that could knock it down. He lists the Trump tariffs, the Trump tax cut, and the threat of inflation as possible sources of and economic speed bump. A CNBC article by Keris Lahiff discusses the bond market, and how it could stop the Fed from implementing its planned rate tightening cycle. The implication here is that if the bond market drives the 3-month yield higher than the 10-year yield (the classic “yield-curve inversion”), that would force the Fed to stop raising interest rates. A third article, by Jeanna Smialek of Bloomberg News, states that the Fed is predicting long run interest rates at about 2.8%, which is an historically low value (the long run average over the past 50 years is closer to 5%).
The question remains: will the Fed continue its rate hike plans despite all of the economic headwinds and questions surrounding the bond market, unemployment, inflation and interest rates? In my opinion, they have no other choice than to pursue the current course of action until presented by
unambiguous data that shows they need to change it.