The Road to Full Employment

Recovery in the U.S. labor market, along with wage growth, may be stronger and faster than expected. Here’s what that could mean for investors.
By Lisa Shalett – With major U.S. stock indexes notching new highs, long-term Treasury yields retreating from recent peaks and lower volatility, investors seem to be embracing an outlook of “just right” economic growth, steady job gains and a patient Federal Reserve committed to helping labor markets heal through ultra-easy monetary policy.

That view is understandable. The U.S. central bank has pledged to remain accommodative, until the economy reaches “maximum employment,” a shift from its historical goal of achieving a “natural” unemployment rate, below which inflation accelerates. Continued Fed dovisheness could support investor appetite for market risk and bolster expectations of lower-for-longer interest rates.

However, we expect a very different dynamic to unfold, as this business cycle progresses—namely, a hotter but shorter economic expansion, with a rapid recovery in labor markets and a burst of wage growth. Such an outcome could push up inflation rates faster than expected and prompt the Fed to raise interest rates, with important implications for portfolio positioning. more>

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