The Fed will be keen to avoid a taper tantrum. But a smooth exit may not be possible given the huge borrowing demands of the US Federal government. The accumulating evidence of a very tight labour market will amplify the market risks.
The JOLTS report is still one month behind payrolls. But it offers a good insight into the scramble for workers companies face as the pandemic fades. Self-evidently, the rise in job openings for leisure & hospitality is related to a scarcity of labour, not strong consumer spending. For the Fed, this is a worry. For the Biden administration, it should trigger a re-think of its obsession with fiscal reflation.
And workers are not afraid to switch jobs in search of higher wages (or perhaps better conditions – greater flexibility). The April data showed a big jump in voluntary quits to 3.95m, the highest since current records began (January 2001).
The Treasury market appears unfazed. Equities have rallied, despite the jump in the core (excluding food & energy) CPI to 3.80% y/y. The CPI numbers look alarming, but a core CPI rising between 2 ½ and 2 ¾% on an annual basis is not something to be alarmed about. The Fed has the flexibility to tolerate a modest rise in core inflation above target, after years of falling short.
The problem is not the CPI numbers today, but the potential rise in wages in the coming months. Inappropriate policy stimulus (low interest rates fueling housing boom, rising mortgage liabilities and deficit-led government spending) increases the risks that a temporary rise in the CPI, whatever the source, is embedded into higher wage inflation.
