What will Cause the Fed to Pivot

Liquidity is the key to market direction.

Last week the jobs number came in at double compared to what was expected. Unemployment is at a 54-year low, this is cause for wage inflation.  Unfortunately, Chairman Powell is stuck between a rock and a hard place. As long as unemployment stays high and most of the labor pool that can work is working, employers are forced to raise wages to get the best talent. That’s wage inflation. People with money spend that money on goods and services that are at a limited production level due to the lack of workers because unemployment is so low, goods and services inflation will continue to go higher. 

So, what will cause the Fed to pivot? A rise in unemployment. What will cause that? Slowing demand. What will cause slowing demand? Goods and services cost way too much. An example scenario.  It has been reported that most households that make over six figure incomes are now living paycheck to paycheck. When those individuals, this has hit those making less than six figure income’s, begin to cut back on spending on goods and services, the demand for those items will begin to decline. Once you see a decline in those goods and services then the employers will not have a need for so many people on staff. They then will lay those people off intern causing unemployment to go up. The other factor that comes into play is the cost of materials to make those products for those people to buy. As the federal reserve continues to raise interest rates, now with a target rate towards 4.75%, the cost of materials rise along with the cost to service the debt they have on their books. Sooner or later, the cost of wages and materials will become too costly so that the consumer will not be able to afford these goods and services.  

Conclusion… Unemployment has to rise. When we see those numbers start to move higher, then we will see pressure on the Fed to create liquidity in the economic system. Until then the Federal Reserve will continue to raise fed funds rate which reduces global liquidity. What drives markets higher? The availability of money. By raising rates and reducing their balance sheet, you have a reduction in liquidity. 

“The wheels on the bus go round and round. Round and round” until a wheel falls off (unemployment).

QQQ and Tesla