What's worse is that these numbers are typically at the low end of the range and suggest the unemployment level may only improve marginally from here and typically preceded a recession. But more importantly, interest rates were much higher, which means the Fed is now very far behind the curve. That means the Fed will now be raising rates at peak employment and economic growth. In reality, the time for them to raise rates has passed. Ending QE, raising rates, and running off the balance sheet will be more than the economy and the markets can handle. It will be a huge mistake.
The last time the U6 measure of unemployment was at 7.3% was in late 2018. The Federal Funds rate was at 2.4%, not its current 0.08%. CPI was also well under 3%. So to say that the Fed is behind on the curve may be a massive understatement.
Inflation May Be Cooling It seems that rates will need to rise aggressively from here, but only the short end of the curve. I think that is less likely to happen on the longer end of the yield curve. The market will realize that an overly aggressive Fed tightening monetary policy at the wrong time will raise the risk of the Fed over tightening and causing a recession. That is why 10-Yr rates have risen so slowly in recent weeks following very high inflation reports. NEXT WEEK, the CPI report will likely show that the pace of inflation cooled in December. The ISM manufacturing survey showed that prices paid in December fell sharply, 14.2 points. That was the most significant decline since October 2011. That would suggest that the CPI also fell sharply in December, as the two tend to move in the same direction. Currently, a Reuters poll shows that estimates are for the CPI to climb in December to 7% from 6.8% in November. A weaker than expected CPI may push rates on the longer end of the yield curve lower, resulting in further yield curve flattening.
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