Labor Market
Labor supply is not meaningfully boosting inflation today, but the net exit of unauthorized immigrants has lowered the bar for stronger labor demand to turn inflationary. Hawkish monetary policy surprises over the coming year are possible.
The Fed is unanimous in expecting a mild tightening cycle of no more than 75 bps, but that outcome is contingent on a rapid drop in core inflation in 2027.
Concerns about the savings rate’s sustainability ease after adjusting for retirements and capital gains. The US economy continues to grow at a pace that is neither too hot nor too cold and investors should remain fully invested in risk assets.
Next week’s CPI and PPI reports will be much more important determinants of the near-term Fed policy path than this morning’s employment report. However, if the trend of labor market tightening continues through year-end, it could lead to a re-acceleration of wage growth in 2027.
