Over the past year, U.S. payrolls expanded by about 3.3 million persons, yet job openings increased by about 1.1 million persons to a 14-year high of about five million, according to the latest Job Openings and Labor Turnover (or “JOLT”) report from the Bureau of Labor Statistics. In other words, demand for labor outstripped supply by 1.1 million persons.
This is a positive development for U.S. workers, as it points to increasing upward pressure on wages as well as further strength in monthly payroll growth and further declines in the jobless rate, which at its current pace is likely to move below 5% by Q1 2016.
The U.S. jobless rate is already within the 5.2% to 5.5% range that the Federal Reserve believes indicates full U.S. employment. One could therefore say that at least one side of the Fed’s dual mandate has been satisfied, although – in the eyes of many at the Fed and elsewhere – not completely satisfied, because American workers have not yet seen much of a pay raise despite better jobs data.
Bond investors see the labor market through a different lens, viewing declining joblessness as a potential catalyst for inflation, which can erode the value of their fixed income investments. Yet, bond “vigilantism” of the type seen in past years (that is, investors selling bonds to combat what they perceive as an overzealous, inflationary policy environment) probably won’t return for quite a long time. This is because central bankers these days sheriff the bond market with great firepower through their bond buying and low interest rate policies. For example, markets today are priced for the European Central Bank to keep its policy rate near zero percent for the rest of the decade.
Nevertheless, in the context of the reduction in labor market slack, too long a delay by the Fed on hikes will likely see a modicum of bond vigilantism return, chiefly through expectations for a higher cumulative amount of Fed tightening than is currently priced, albeit not much. One strategy the Fed might consider is to act sooner rather than later, say by June or September. This way, the Fed can quell rate worries by itself showing vigilance on inflation, thereby capping longer-term interest rates, which essentially reflect cumulative bets on where the Fed’s policy rate will be in the future.