Fed to bring forward the first rate hike to 2022 amid tightening labor market – Rabobank

Next month should be crucial for the labor market as temporary labor shortages are expected to disappear, and more permanent labor shortages will become visible. Therefore, the Federal Reserve may find there is less slack in the labor market than anticipated. Consequently, the Washington-based institution may have to make an additional upward shift in the dot plot in the coming months, as reported by Rabobank.

Employment growth to accelerate once the causes of the temporary labor shortage fade

“While Republicans and Democrats are pointing to different causes for the temporary labor shortages, the empirical evidence suggests that both unemployment benefits and child care considerations are playing a role. However, these temporary effects should fade during the course of September.”

“A permanent labor shortage is caused by retirement. This means that we should not expect a recovery of the participation rate to pre-covid levels.”

“For the Fed, a temporary labor shortage means that upcoming monetary policy decisions – such as giving signals about tapering – will have to be made in a noisy environment where data is being distorted. 

“For the FOMC, the smaller the shortfall in employment the earlier they may want to hike. The higher-than-expected inflation readings in recent months have already led to an upward shift in the dot plot, indicating that the FOMC now expects to hike twice in 2023, instead of waiting until 2024. If more of the ‘temporary’ labor shortage turns out to be permanent, the FOMC may be forced to shift its first hike to 2022.”