As we know, the US Federal Reserve has two primary responsibilities—what is known as its dual mandate: price stability and full employment. As it concerns the former, the Fed’s long-term inflation target is 2% based on the core Personal Consumption Expenditures Index or PCE (though the bank is comfortable letting inflation run above or below that number for some time). As it concerns the latter, most pundits seem to think a mid-3% unemployment rate is indicative of full employment. During the worst of the pandemic, the Fed emphasized supporting the job market and restoring the millions of jobs lost when the economy was shut down before pivoting to an emphasis on inflation fighting late last year when it became clear historically high inflation was proving more persistent than expected.


As we kick off the fourth quarter, investors are wondering when the Fed might feel comfortable easing up on the rate hiking front (as hawkish monetary policy more than anything else, we think, has weighed on stocks and bonds in 2022). The Fed won’t continue to hike at a 75 bps-per-meeting pace until the PCE hits 2% but should moderate its rate hiking efforts as the inflation data comes in more benign, and consistently so. As it concerns the inflation data, the Fed, like the rest of us, will be paying attention to headline data points including the PCE and Consumer Price Index. That said, there are other data points that could also help us determine when the Fed is closer to taking its foot off the break, and those include energy (energy might be excluded from core inflation readings but it’s hard to ignore the price of a barrel of oil has plunged from $123 to $80, and the impact that has on consumers’ inflation expectations); housing (the Case-Shiller Home Price Index fell 0.2% in July, the first monthly drop since 2012 ) and employment (which hasn’t shown the type of deterioration that might convince the Fed its efforts to slow growth – and with it inflation – is taking hold as last week initial unemployment claims came in below expectations at 193,000, and at a five-month low; see chart). We think we can credibly check off the energy and housing data points, but not employment. It feels wrong to root for a weaker jobs market, but until the labor market softens, it seems likely the Fed won’t soften its stance concerning interest rates.


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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1834-BCI-10/3/2022