Europe has stalled, Asia is slowing and Australia has stumbled, but the US economy remains superior. Eventually, rising interest rates will erode American economic strength, but we’re not there yet. Today’s jobs report points to a resilient economy that stands out from the rest of the world. The unemployment rate of 3.5% is another record low and there are no signs of mass layoffs outside the bloated tech industry. Currency markets have largely priced in various financial assets, which is why the US dollar has been so strong this year, but the Fed expects to hold 5.00% and see how the economy does. For most of the past week, predictions have been mounting that surgery could be the change after that, but now the risks are becoming increasingly two-sided. Addresses from other global central banks have suggested that the Fed will do the same, but we may be moving to a scenario where the gap widens. This gives USD strength in all things that come with it, especially in emerging markets. The argument is that the Fed will march until something breaks, and with numbers like these, it’s still possible. Another danger is that monetary policy continues to operate with a long and variable lag. Several Fed officials, including Cook yesterday, said the delays are shorter because of bond markets and futures messages, but that companies remain reluctant and slow to cut jobs and reduce inventories. This could mean that the delays are longer than usual and that the tax increase will end up being a big policy mistake. For now, though, you have to go where the data leads, and that means strength in the US dollar — at least until next Thursday’s CPI report.
