@BNP Asset Management.
BNP Paribas Asset Management believes September’s stronger-than-expected labour market report was ‘more noise than signal’ and does not indicate a renewed surge in US economic growth. In our view, the US economy remains on a path towards a so-called soft landing, with core inflation set to gently descend to the US Federal Reserve’s 2% target (or slightly above).
Looking at the broad range of labour market indicators, we see a job market that has rebalanced despite historically strong output and employment growth, suggesting that the economy is operating beneath its (currently elevated) potential growth rate.
At the Jackson Hole conference, Chair Jerome Powell noted the Fed’s comfort with inflation, but also its concern over upside unemployment risks. These worries justified the Fed’s 50 basis point interest rate cut in September.
Even if the Fed upgraded its assessment of labour market conditions, we believe the argument for returning rates to neutral would remain valid. Neutrality for the fed funds rate, to our mind, is probably 3%, but could be as high as 3.5%.
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