In a generally upbeat Jackson Hole speech on Friday, Fed Chairman Kevin Warsh asserted that “labor markets are consistent with full employment”. Given that the current unemployment rate, at 4.1%, is the lowest it’s been in 18 months and is also lower than it has been 88% of the time over the past 50 years, it is hard to argue with the Chairman’s assessment.

In a generally upbeat Jackson Hole speech on Friday, Fed Chairman Kevin Warsh asserted that “labor markets are consistent with full employment”. Given that the current unemployment rate, at 4.1%, is the lowest it’s been in 18 months and is also lower than it has been 88% of the time over the past 50 years, it is hard to argue with the Chairman’s assessment.

Labor Market Mysteries

On balance, I don’t believe that the Federal Reserve should have raised interest rates last week. However, I must confess that there was one reference in Chairman Warsh’s press conference that left me distinctly uneasy. He noted that year-over-year inflation rates, as measured by the core personal consumption expenditure (PCE) deflator and the core consumer price index (CPI) were running at about 3.2% and 2.4% respectively.

On balance, I don’t believe that the Federal Reserve should have raised interest rates last week. However, I must confess that there was one reference in Chairman Warsh’s press conference that left me distinctly uneasy. He noted that year-over-year inflation rates, as measured by the core personal consumption expenditure (PCE) deflator and the core consumer price index (CPI) were running at about 3.2% and 2.4% respectively.

The PCE-CPI Gap and the Outlook for Further Fed Tightening

Money was tight in our early married years. We bought a house we couldn’t afford, purchased a car we couldn’t afford and had all the expenses attendant on the raising of two young boys. However, as we wandered the local mall gazing at all the other things we couldn’t afford, we were always willing to stop into Godiva to get chocolate squares. Godiva was, of course, more expensive than Hershey bars. But no one was going to go broke buying chocolate squares – it just wasn’t a big enough item to feature in our budgetary woes.

Money was tight in our early married years. We bought a house we couldn’t afford, purchased a car we couldn’t afford and had all the expenses attendant on the raising of two young boys. However, as we wandered the local mall gazing at all the other things we couldn’t afford, we were always willing to stop into Godiva to get chocolate squares. Godiva was, of course, more expensive than Hershey bars. But no one was going to go broke buying chocolate squares – it just wasn’t a big enough item to feature in our budgetary woes.

Money was tight in our early married years. We bought a house we couldn’t afford, purchased a car we couldn’t afford and had all the expenses attendant on the raising of two young boys. However, as we wandered the local mall gazing at all the other things we couldn’t afford, we were always willing to stop into Godiva to get chocolate squares. Godiva was, of course, more expensive than Hershey bars. But no one was going to go broke buying chocolate squares – it just wasn’t a big enough item to feature in our budgetary woes.

The Road to $40 Trillion

In the Broadway musical, Fiddler on the Roof, Tevye, the well-meaning patriarch of a poor family, has to make some tough choices in a complicated time.  Tevye, (who always reminded me of my father-in-law, Bill), has trouble deciding and three times during the play the music comes to a halt as he wanders through a long soliloquy of “on the other hand’s”.
The Federal Reserve also has a tough choice to make in a complicated time.  We now believe that they will raise rates this week.  However, it is important to understand the logical twists and turns needed to reach that conclusion in order to trace out a potential path forward for the economy, interest rates and asset class returns.
To bring some structure to the argument, the issues can be divided into three sections: the economy, the FOMC itself and the importance of Fed credibility.

In the Broadway musical, Fiddler on the Roof, Tevye, the well-meaning patriarch of a poor family, has to make some tough choices in a complicated time. Tevye, (who always reminded me of my father-in-law, Bill), has trouble deciding and three times during the play the music comes to a halt as he wanders through a long soliloquy of “on the other hand’s”. The Federal Reserve also has a tough choice to make in a complicated time. We now believe that they will raise rates this week. However, it is important to understand the logical twists and turns needed to reach that conclusion in order to trace out a potential path forward for the economy, interest rates and asset class returns. To bring some structure to the argument, the issues can be divided into three sections: the economy, the FOMC itself and the importance of Fed credibility.

In the Broadway musical, Fiddler on the Roof, Tevye, the well-meaning patriarch of a poor family, has to make some tough choices in a complicated time.&nbsp; Tevye, (who always reminded me of my father-in-law, Bill), has trouble deciding and three times during the play the music comes to a halt as he wanders through a long soliloquy of “on the other hand’s”.
The Federal Reserve also has a tough choice to make in a complicated time.&nbsp; We now believe that they will raise rates this week.&nbsp; However, it is important to understand the logical twists and turns needed to reach that conclusion in order to trace out a potential path forward for the economy, interest rates and asset class returns.
To bring some structure to the argument, the issues can be divided into three sections: the economy, the FOMC itself and the importance of Fed credibility.

The Fed Paints itself into a Rate-Hiking Corner

The era of low growth, low inflation and super-low interest rates that followed the Great Financial Crisis was christened by Mohamed El-Erian as “The New Normal”. While this episode largely came to an end with the post-pandemic growth and inflation surge, real interest rates had generally remained below the levels that prevailed in the decades before the financial crisis until recently. However, a steady bond market selloff in 2026, which accelerated over the summer, has now pushed real long-term Treasury yields to their highest levels since 2010.

The era of low growth, low inflation and super-low interest rates that followed the Great Financial Crisis was christened by Mohamed El-Erian as “The New Normal”. While this episode largely came to an end with the post-pandemic growth and inflation surge, real interest rates had generally remained below the levels that prevailed in the decades before the financial crisis until recently. However, a steady bond market selloff in 2026, which accelerated over the summer, has now pushed real long-term Treasury yields to their highest levels since 2010.

The New, New Normal

Listen every week to Dr. David Kelly’s commentary on the markets and economy

Dr. David Kelly’s Notes on the week ahead - January 21, 2020

Among the card games of my misspent youth was a game called Pontoon. The rules of Pontoon are very similar to Blackjack – the object is to get as close to 21 as possible without going over.

Among the card games of my misspent youth was a game called Pontoon. The rules of Pontoon are very similar to Blackjack – the object is to get as close to 21 as possible without going over.

Getting to 21 without going bust

Dr. David Kelly’s Notes on the week ahead - January 13, 2020

On economic news, the December Jobs report generally suggested stable growth. The payroll job gain, at 145,000, was slightly weaker than consensus but not alarmingly so.

On economic news, the December Jobs report generally suggested stable growth. The payroll job gain, at 145,000, was slightly weaker than consensus but not alarmingly so.

Stable Growth, Fading Risks and Rising Valuations

Dr. David Kelly discusses his current investment landscape, U.S. economic growth, political and trade risks, and late cycle opportunities.

Guide to the Markets for the first quarter of 2020

Dr. David Kelly’s Notes on the week ahead - January 6, 2020

25 years ago, I had the privilege of working with a very smart and well-respected strategist at a Wall Street sell-side firm.

25 years ago, I had the privilege of working with a very smart and well-respected strategist at a Wall Street sell-side firm.

Understanding Underreaction

Dr. David Kelly’s Notes on the week ahead - December 30, 2019

My wife, Sari, and I have a long-standing disagreement about how warm our home should be.I contend that a man shouldn’t have to wear an overcoat in his own house just to ward off frostbite.

My wife, Sari, and I have a long-standing disagreement about how warm our home should be.I contend that a man shouldn’t have to wear an overcoat in his own house just to ward off frostbite.

Hot and Cold Wars

Dr. David Kelly’s Notes on the week ahead - December 16, 2019

Listen to the latest insights from Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management to help prepare you for the week ahead.

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