Wall Street appears to be proceeding with caution amid reports that the U.S. job market continues to break economic records.
Over half a million jobs were added in the month of January alone.
Though financial markets bounced back after previous losses, the strong labor industry has some investment firms worried that it will spur the Federal Reserve to continue raising interest rates.
In an effort to curb business and consumer spending, the fed funds rate was hiked seven times in 2022 alone.
Higher interest rates mean borrowing becomes more expensive, particularly when it comes to a large purchase like buying a home.
Lower supply and demand ultimately lead to a reduction in prices.
Inflation has been on a slow, but steady, decline over the past six months, but according to Barron’s, Wall Street isn’t confident that it’s falling quickly enough to stave off future rate hikes.
More people working means more people spending money, potentially keeping inflation elevated. That could necessitate more rate hikes, which are meant to cool inflation by reducing economic demand. – Barron’s
Still higher than the Fed’s target inflationary rate of 2%, annual inflation slowed to 2021 levels.
Mike Loewengart, the head of Morgan Stanley’s model portfolio construction division, isn’t confident that the public will see a drop in interest rates in the coming year if job growth continues to exceed expectations, giving consumers reasons to continue spending.
“It’s going to get harder to argue that rate cuts may be in 2023’s future if the labor market is able to continue like this,” Loewengart told Barron’s. “Especially considering that it remains to be seen how quickly inflation will fall, even if we have reached the peak.”
Wall Street’s fears, however, may be unwarranted.
While job growth is up, wages have been on a downturn.
Financial leaders believe this could offset inflation by making it more difficult for companies to continue raising consumer prices.
Both short and long-term Treasury bond yields have gone up in recent months, which is an indicator of where the economy is headed – as prices fall, yields rise.
“Our focus is not on short-term moves, but persistent moves,” Chairman of the Federal Reserve Jerome Powell said.
As the country continues to rebound from nearly three years of a worldwide pandemic that affected supply chains, and broke inflationary records around the globe – the stock market reaction will hopefully be temporary.
Original reporting by Emily Dattilo, Jacob Sonenshine, and Adam Clark at Barron’s.
Follow Ty Ross on Twitter @cooltxchick
