Spare a thought for the U.S. Federal Reserve's (the Fed's) policymakers. At the Federal Open Market Committee (FOMC) meeting on December 18 and 19, they look set to hike rates again. This may well prompt angry reactions via Twitter, and not just from the White House. On Wall Street, too, concerns have been on the rise in recent weeks that the Fed might overdo things in the current tightening cycle.
Such concerns make sense in light of recent financial-market weakness. But they are starkly at odds with the available data on the underlying health of the U.S. economy. As our Chart of the Week shows, unemployment has continued to shrink to levels not seen in almost 50 years. Against this backdrop, wage growth has been surprisingly moderate throughout the current, extended business cycle. There has been a slight uptick in the most recent data. "Labor costs are accelerating, albeit still moderately," Josh Feinman, U.S. chief economist at DWS points out. That said, wage growth still appears broadly consistent with the Fed's inflation target.
So, are financial markets worried for no good reason whatsoever? Not quite. Dampening demand growth, tighter financial conditions, trade frictions, U.S. dollar (USD) strength and weaker growth in the rest of the world will limit the need for further interest-rate hikes – eventually. The problem is that these potential drags on U.S. growth are very fluid and tend to change by the day. By contrast, monetary policy, even in the best of times, only works with long and variable lags. Policy errors are certainly possible. Fortunately, we do not believe that the U.S. economy is on a knife's edge, where slight policy changes can destabilize the economy.
Source: Bloomberg Finance L.P. as of 12/10/18