1 min read

The Fed v. Job Market

The job market is beating the Fed and that's bad for inflation

Last Thursday, The Fed Chair Jerome Powell led with a short but heavy hand in his speech at Jackson Hole. My belief is that he and the Fed were unhappy with how the economy and job market have reacted to his rate hikes and need to be stricter and clearer about their future policy. Here are a few of my thoughts on what's going to happen in the global economy.

Powell has mentioned the labor market, job openings, and unemployment rate many times in all his speeches this year. I believe the Fed is heavily utilizing this number to evaluate the efficacy of his words and actions. It makes sense because payroll is reported directly to the IRS which makes it the most accurate and real-time data that they have.

About those fed rate hikes: as the cost of capital increases (interest rates), the harder it is for companies to borrow capital to sustain their growth plans, which is primarily fueled by employee growth. Companies with poor balance sheets and cannot offset costs (e.g., fundraising, public market capital) will need to trim their costs, leading to layoffs. If the unemployment rate stabilizes or increases, the Fed will recognize their actions are finally beating inflation. For example, if people are not able to jump jobs as frequently it will lead to a lower chance of rising salaries, which is a proponent of inflation. The sad news is the unemployment rate is still decreasing despite the rate hikes and that more layoffs are soon to come.

As seen in the past few months, companies are going through layoffs left and right, especially with companies with mind-blowing P/E ratios (e.g., Peloton, Netflix). Companies will no longer fight against one another for top-tier talent because they cannot afford it and it will soon become a lot harder for people to switch jobs for similar pay and benefits. I personally believe Apple, Google, and others know this fact and are implementing RTO because of it. If you can't find another job, you don't have any other option but to return to the office. Quiet quitters will also soon see pain too since companies will look at performance per dollar with a microscope too.

To my friends, I advise hunkering down, preferably at a company that has a healthy balance sheet. The labor market is going to shift dramatically in the next 12 months.