Good Tuesday morning from your Hometown Lender,

No news today.

We had a 10yr auction that went well. Tomorrow is CPI day and markets are unlikely to be as calm as they are today.

Bloomberg had a good piece today worth sharing. There as lots of other influences on rates but this is a good primer.

Fed Chair Jerome Powell testified yesterday, though it didn’t seem to move markets all that much, probably because he didn’t make a ton of news.

However, there was one key headline that ran near the end of the testimony that really clarified what may be a key moment in the cycle:

*POWELL: LABOR IS NOT A SOURCE OF INFLATIONARY PRESSURES NOW

In a sense, this line is the whole ballgame.

Throughout the last three or four years, there have been two general stories about what caused inflation. One was focused on supply-side capacity (supply chain disruptions, Russia’s invasion of Ukraine, deglobalization, and so forth). The other has highlighted the tightness of the labor market. Most economists probably see both dimensions as factors, though there are wide disagreements about how to weigh the two.

But regardless, there’s not much that the Fed can really do to improve supply-side capacity. So in terms of the Fed’s job, it’s mostly about easing that labor component.

To this point, one of the most popular measures has been the ratio of unemployed workers to total job openings. Anyway, in the last couple of months this ratio has returned to the levels of 2019, prior to the Covid downturn.

So the whole thing can in a way be summarized in four sentences:

• The Fed has attempted to cool inflation by bringing about normalization in the labor market
• One of the most popular measures of labor market tightness has now erased its Covid-era extremes
• The labor market is therefore no longer a source of inflationary pressure
• From the Fed’s perspective, the inflation driver that it can influence (or at least believes it can influence) through rate policy is gone.

Of course, one or more of these points could be wrong.

Maybe we’re measuring labor market tightness wrong. Maybe the labor market will re-tighten (after all, in the most recent JOLTS report, the number of job openings did tick up a little bit). Maybe the link between labor market tightness and inflation is not particularly robust. Maybe there are other factors in the economy still lurking that will cause inflation to re-accelerate. It’s all possible.

But regardless, just looking at it from the Fed’s perspective, there is a sense that when Powell is saying that the labor market is no longer a source of inflationary pressure, that he’s declaring some form of mission accomplished.

As always, please let me know if you have any questions and if there is anything we can do to add value to your day.

Stay safe, and make today great!