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Solid Employment Outweighs Squishy Inflation

Markets have pared back their expectations for further Fed policy action due to sluggish inflation and a slower pace of job growth. Markets may be misreading the recent economic data and the Fed’s resolve. In our view, the FOMC remains on track for rate hikes in June and September and balance sheet reduction this fall.

The FOMC will get a chance to weigh in on recent economic developments later this month. In the meantime, it appears markets are reading the economic tea leaves differently that the Fed may be…

• Inflation: Markets view the recent soft patch in inflation as sufficient to put the Fed on pause. However, the consensus Fed view still maintains inflation will stabilize by summer. While sluggish inflation may make some FOMC doves weak in the knees, it has yet to persuade the center of the Committee to delay policy normalization.

• Employment: Markets found May’s jobs data and revisions to prior months to be disappointing. However, from the Fed’s perspective the employment picture remains very solid and now, more sustainable. The 2017 monthly average of 160K new jobs created every month is lower than last year’s 180K pace. Yet it is more than sufficient to keep labor markets tight and is highly supportive of further policy action.