Animal Spirits: A Tough Break

Markets are in a tough spot. That’s because good news has become bad news. The strong job market sounds like a good thing. But it also means that the Federal Reserve is likely to continue raising interest rates. That’s why good jobs numbers have led to down days for the market in recent months.

The most recent data shows a slowdown in job openings. That hasn’t done anything to change the unemployment rate.

But it does show that the signs of a slowdown have finally appeared. That may not be enough to change monetary policy, however.

Overall, that suggests that the Fed is on track to send the economy into a recession to curb inflation.

That would be similar to the move that it made in the late 1970s, when inflation hit double-digit levels. It took a steep hike in interest rates and a recession to break inflation back then.

The high inflation and interest rates of the 1970s led to a lost decade for stocks, as well as a poorly-performing housing market. Assets took off as inflation came under control and interest rates could decline.

Today, inflation has likely been driven by pandemic stimulus, which has worked its way through the economy already.

That’s why many see inflation coming down in the year ahead. Additional government spending and factors such as supply chain issues could still keep some prices higher for longer.

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