Talent Talk: The Fed Finally Broke Something

The latest batch of jobs data would seem to indicate that the Federal Reserve and its chairman Jerome Powell have finally achieved their mission. Job openings in October tumbled by 617,000 to the lowest level in 2½ years, more than 1.7 million fewer openings than just a year ago.

The Fed really wanted to break the labor market

Conventional Wall Street wisdom says that when the Federal Reserve starts to raise interest rates, which it did on March 17, 2022, it will continue to do so until something breaks. The hope is that inflation breaks first, but sometimes it’s the economy or the banking system. In this cycle, what the Fed really wanted to break was the labor market.

The hottest labor market in our lifetimes seemed like it could not be defeated. Talent Talk wrote many times in 2022 and 2023 about how it defied conventional logic. Consequently, we predicted that interest rates would need to reach the 5.5 to 6.0% range, far higher at the time than almost anyone was predicting. (The fed funds rate currently sits at 5.5%.)

Fed pauses interest rate hikes

After about 18 months of warning that rates would climb higher than most expected, we have now moved to the camp that says the Fed is done raising rates. We don’t think it will begin to lower them until it has several cycles of confirmatory data.

Related:Talent Talk: Is the Manufacturing Recession Almost Over?

We also talk a lot about the difference between the overall economic data and the manufacturing sector. The 617,000 fewer job openings were mostly confined to health and social care, financial activities, leisure and hospitality, and retail. Manufacturing did shed 14,000 jobs, but that makes it a relatively strong sector, and poised to be a leader should we be able to navigate a soft landing after all.

Headwinds easing?

Manufacturing has been battling significant headwinds, including the triple whammy of inflation, which increased the price of materials; high interest rates, making capital investments more costly; and the shortage of skilled labor. The recent cooling in the jobs market gives hope that all three of these headwinds may begin to die down.