The Federal Reserve’s Changing Approach to Inflation

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According to Rick Rieder, BlackRock’s chief investment officer of global fixed income, the Federal Reserve may be able to ease up on its fight against inflation now that the labor market is cooling down. Over the past three years, the U.S. has gained an impressive 26 million jobs, which Rieder compares to adding an entire economy the size of Australia or Taiwan.

The monthly jobs report for August revealed that the U.S. added 187,000 new jobs, slightly exceeding expectations. However, it also indicated a small increase in the unemployment rate from 3.5% to 3.8%. Rieder highlights that between May 2020 and April 2022, an astounding 22 million people were hired, and from June 2021 to May 2023, an additional 11 million were added to the workforce. He believes that the economy has opened up numerous fulfilling roles, leading him to predict that wage pressures will ease and the Fed can feel more confident in the long-term stability of lower levels of inflation.

As hiring in the U.S. slows down, Rieder notes that education and healthcare services remain exceptions to this trend when looking at private payrolls based on a three-month moving average.

Overall, Rieder’s analysis suggests that the remarkable job growth in recent years has addressed many of the economy’s needs. Consequently, he suggests that the Fed can consider slowing down or even halting its interest rate increases by the end of the year.

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The Fed’s Interest Rate Hike: A Potential Calming Effect on Markets

The Federal Reserve (Fed) made a significant move in July by raising interest rates to a 22-year high, placing them in the range of 5.25% to 5.5%. However, it seems traders in fed-funds futures are not expecting another rate hike in September, with only a meager 7% chance priced in. Furthermore, there is a growing preference for no rate hike during the central bank’s November policy meeting.

According to BlackRock, one of the world’s largest asset managers with $2.7 trillion in assets under management, a possible pause or cessation of rate hikes from the Fed could potentially bring some calm to the markets. Even if BlackRock’s expectation of the Fed keeping rates high for a duration comes true, markets could still benefit from a sense of stability.

As the long holiday weekend for Labor Day approached, U.S. stocks experienced volatility on Friday. The Dow Jones Industrial Average (DJIA) saw a minor increase of 0.1%, while the S&P 500 index remained relatively flat. In contrast, the Nasdaq Composite Index endured a 0.2% decrease, according to FactSet.

Although the 10-year Treasury yield reached its highest level since 2007 towards the end of August, currently standing at around 4.18%, this surge has contributed to the volatility that has erased earlier gains made in the approximately $25 trillion Treasury market.

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