In a world of low inflation, it is quite possible that bond market curves will invert (modestly) without this being a signal that policy is too tight. It may simply be the natural order when an economy is at full employment, and inflation is being pinned at low levels due to rising productivity. Despite the sell-off, IT shares still gained further ground last week.
Nevertheless, President Trump is ramping up the pressure, planning to nominate Stephen Moore, a fierce critic of the Federal Reserve to the central bank board. The FOMC is under pressure to deliver on growth. The Trump administration needs tax revenues to rise quickly: February’s increase (7.5% y/y) was a step in the right direction, but the economy will have to stay strong for the CBO deficit target to be hit this year (4.2% of GDP).
Initial jobless claims remain close to historic lows and will take on added significance this week and next. Job openings have soared, according to the JOLTS. The NFIB survey for February showed a drop in hiring plans, but the index for actual employment changes (for the last three months) rose to a new cyclical high. The March payroll is likely to confirm some deceleration in hiring during the first three months of 2019. How much, is critical: markets have been spooked by the Eurozone and US PMIs.
Mr Powell did little to help in this regard. His focus last week was solely on economic indicators and growth prospects. There was – again – very little analysis of the trade-off between growth and inflation, and how this has fundamentally changed.
