The Fed May Have More Hiking to Do
The Fed may have more work to do.
Based on the usual relationship between inflation expectations and the labor market, the fed funds rate would be closer to 5% right now.
That’s more than 100 bps above the current 3.75% level. 👀
The bigger issue is what’s happening underneath the surface.
🔥 Inflation expectations have settled into a higher range.
💼 The labor market is heating back up and remains relatively tight.
Put those two pieces together and the current policy rate starts looking less restrictive than it appears.
The Fed’s recent hesitation may have bought some time, but the data is pushing the other way. Recent inflation data has already increased market expectations for a hike, while stronger employment data has added more pressure.
📊 The chart tells the story clearly.
If inflation expectations stay elevated and labor conditions remain firm, the market may need to rethink where the “normal” policy rate actually sits.
For now, 5% is the level I’m watching.
The question is no longer just whether the Fed hikes.
It’s how far rates may ultimately need to go. 👀📈
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