“Data Driven” Rate Environment

This week’s comments from Fed member Thomas Barkin are telling: “I think it’s very helpful for us to have a few more months to evaluate, is inflation going to come back to normal? Is the labor market going to open up?” He made it clear that more data is needed before raising rates. Now that the tapering of the Fed’s bond purchases has been quantified and announced, the next move on rates will be dependent on the direction of the economy. The Fed bought some time with the tapering announcement. The bond buying will be lowered over the next 6-8 months while the Fed is able to further gauge if inflation is transitory or more permanent. Regarding the labor market, the labor participation rate is increasingly in the spotlight. Labor participation has historically been 63-64% since the Great Recession. It dropped to 60.2% in February 2020 during the “shutdown shock” and is back up to about 61.6%. More labor participation will help the inflation picture: worker shortages are affecting the supply chain, wage inflation is spiking, etc. Participation has been gradually rising in the last few months. This week, the 10 year Treasury hit 1.65% on a strong retail sales report. Today it dipped to 1.58% on a weaker than expected homebuilding report. Look for data driven ups and downs to be the norm for a while. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners