With the latest unemployment rate below 4%, many policy makers are likely to see the US economy as being near maximum employment.

Big Hurdle Cleared in Latest Jobs Report

Since the onslaught of the pandemic, the Federal Reserve has identified a “healthy” labor market as having an unemployment rate at or around 3.5%, the pre-pandemic level.

The December jobs report indicated the unemployment rate dropped to 3.9% in December…a big step toward the 3.5% level Fed officials anticipated happening at the end of 2021 and remaining at that level through 2024.

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On top of the unemployment rate dropping to 3.9%, this December jobs report indicated average hourly earnings increased +4.7% from one year ago and +0.6% from November.

Additional Influential Economic Markers

On top of the unemployment rate, the Federal Reserve will look at inflation via the Consumer Price Index and  the Employment Cost Index (ECI) that indicates wages and hours worked.

The latest Consumer Price Index (CPI) data most recently indicated an increase of +7.0% in December, the biggest inflationary pop in 40 years.  (Without food and fuel prices, that CPI gain was 5.5%.)

Omair Sharif, founder of Inflation Insights, said, “Obviously 7% is a pretty big sticker shock.”  Sharif said that inflation could plateau at approximately 7% but would take time to come down.  Sharif thought that perhaps inflation in 2022 would end lower than 7% but that it would still likely be above the nearly 2% level that Fed policymakers would prefer.

Specific to our interests, rents rose +4%, the most since February 2007.


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(Policymakers are expecting inflation to drop to 3% in 2022, no month specified.)

The “wild card,” the Q4 Employment Cost Index (ECI), will be released on January 28.  Based on wages and benefits increasing nationwide +1.5% in Q3 2021 compared to Q2 and a nearly +6% increase in the ECI on an annualized pace, policymakers are expecting wage data in this forthcoming report to be up substantially.  In December 2021 alone, without the two prior months of the Q4, hourly earnings and hours worked were up nearly +10% relative to one year ago during that same month.

Bottom Line

Since gradual rate hikes are already happening amid an economy with almost “normal” unemployment rates and an inflation rate of 7.0%, it’s looking more and more like a done deal that the Federal Reserve will be formally announcing a series of interest rate hikes for 2022 at its next meeting in early March.

You might mention all of this to your potential buyer clients who may want to lock in current mortgage interest rates before those rates go up in the next few weeks.

Thanks to Bloomberg.

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