MainStreet Macro: Is the Fed ready for a running play?

Last week brought fresh job data from the ADP Research Institute and the Bureau of Labor Statistics, and another rate hike from the Federal Reserve.

Football season is in full swing, too, so here’s some color analysis of the game we’re all watching: Team Fed v. Team Inflation.

Quarterback Jay Powell’s latest pass – a 0.75 percent rate hike – might be his last before Team Fed shifts to a running game. Let’s cheer them on – and hope they’re in good position for a touchdown.

The Fed’s opponent

Powell and his team haven’t faced an opponent this formidable in 40 years, which was the last time inflation was so high.

Because of that, we can’t know for certain how effective the Fed’s rate-hike playbook will be or how long it will take for Powell’s team to score against inflation.

The Fed’s playbook

The Fed has only one real play for gaining yards against inflation – interest rate hikes. The central bank increases the federal funds rate, a benchmark that’s tied to other rates, which makes it more expensive to borrow and cools demand for goods and services. Mortgages, credit cards, small business borrowing, and auto loans are affected by Fed rate hikes.

Team Fed has raised interest rates six times this year. Four of those actions were long passes, aggressive increases of three-fourths of a percentage point.

Teams gain yardage more quickly when they pass the ball down the field. But as they get closer to the goal line, they often employ a running game to prevent interceptions and control the pace of the action.

The Fed and its quarterback have been playing a passing game against inflation. The strategy has made sense because benchmark rates were near zero at the kickoff. (We’ve been fortunate that Team Fed hasn’t resorted to a Hail Mary pass of more than 1 percent.) 

Now that benchmark rates are near 4 percent, I expect the Fed to start running the ball to better control the play. Powell hinted at exactly that last week, suggesting that his team could soon shift to smaller and more precise rate increases. 

Prepare for an audible

Sometimes the quarterback, upon seeing how the defense is lined up on the field, changes the play in the moment. The Fed is facing a labor market that’s lining up tight and really strong.

The economy created 261,000 jobs in October, according to the BLS. ADPRI reported an increase of 239,000 jobs in the private sector alone, and showed that pay growth is still elevated, up 7.7 percent over the last 12 months for workers who didn’t change jobs. Pay growth was around 2 percent a year ago.

For the Fed to win against inflation, wage growth has to slow. The Fed is paying close attention to how the labor market responds to higher rates. If hiring is too strong or weakens too abruptly, Powell might call an audible when his team huddles in December.

My Take

Over the next couple months, we’ll see whether the Fed is far enough down the field to call a running play into the end zone. The 2 percent inflation goal post hasn’t moved, but we’re not sure yet how close the Fed is to scoring.   

We each might root for our favorite teams (I’m really excited about the Buffalo Bills these days), but all of us should be able to unite behind Team Fed and its playbook for scoring touchdowns against inflation, even if the game is painful to watch.