When Will the Fed Come Around?

Stocks opened mixed this morning, reacting to tension between investors and the Fed. Currently, the Dow is flat and the S&P 500 is down .5%. The VIX fear gauge remains under 20, suggesting no panic. But we’re definitely seeing some deterioration in economic data. Not surprisingly, Treasuries and high-grade corporate bonds are trading higher.

US job openings fell to 9.9 million in February in a sign that the labor market is beginning to cool. Openings declined to the lowest level since May 2021, though it’s important to point out that we still have more open positions than people looking for work. The Bureau of Labor Statistics’ JOLTS report pointed out that hiring activity eased, but at the same time layoffs fell. Employers are getting more cautious, but certainly aren’t panicking. The Federal Reserve in particular will take note of this report since it believes an out-of-balance job market is largely to blame for elevated inflation. Fed Governor Lisa Cook recently acknowledged the economy has shifted from an inflationary, to a “disinflationary” trend. Part of the reason for this is moderating wage gains. So far, so good. However, she and other Fed officials don’t see enough progress yet to call an end to monetary tightening. Cleveland Fed Bank President Loretta Mester says short-term interest rates need to be above 5% in order to get inflation under control.

An increasing number of investors suspect the Fed is dead wrong. Are they tough-talking us in order to keep a lid on the stock market? Or are they tone-deaf to the recent trend in economic data? Today we learned that the ISM Services Index fell to 51.2 last month signaling an unexpectedly sharp slowdown in business activity. The survey revealed lower levels of new business, hiring and wholesale inflation. Services represent about 90% of our economy. So it is very clear that Fed tightening is having the desire effect—knocking down inflation by reducing economic activity.

Even the hottest areas of the economy are finally beginning to moderate. Demand for travel services has been unusually strong, but Marriott’s (MAR) CEO says he expects both demand and hotel room rates to moderate during the second half of 2023. CNBC reports that vacation rental prices are up 6% vs. a year ago. While still abnormally high, that rate is less than half of what it was at the peak in 2022. Hotel occupancy is back down to 65%, which is a bit less than a year ago. And a CNBC survey suggested one-third of Americans plan to spend less on travel in the coming year.