📝 Unemployment Rates Need To Rise About 1% Before Inflation Cools: Nordea

Fed also focuses on the second hand effects from monetary policy felt through financial markets. Higher credit costs and lower equity premiums shrinks private wealth and makes it harder for companies to raise cash. The selloff in equities this year has brought P/E ratios back to more normal levels. It is the Fed’s hope that less froth in market pricing will make investors feel less wealthy and lead to less spending while at the same time defer some company investment and hiring. Hopefully, it will also improve the labor market by forcing some early retirees back to work.

Even if we can hope that we have seen the worst of goods inflation, high wage growth will continue to keep service inflation at an elevated level. To get inflation back toward the Fed’s 2% target, wage growth must probably come down to 3% and for that to happen, the labor market will need to cool considerably. Said differently, unemployment rates will need to increase, probably by about a full percentage point. We still believe rates will need to increase going forward, see our latest forecast.

- Nordea