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Macroeconomics: Payrolls Spurs Earlier Fed Hike Risks

10 Jan 2022 Written by: Mansoor Mohi-uddin (Chief Economist Bank of Singapore)

December’s US payrolls report caused equities to fall and bond yields to rise further.

  • December’s US payrolls report caused equities to fall and bond yields to rise further on Friday as the tightening labour market raises the risk of Federal Reserve rate hikes starting in March.
  • Payroll gains were lower than expected at 199,000 but revisions to earlier months added 141,000 jobs, unemployment fell from 4.2% to 3.9% and wage growth was robust at 4.8%YoY.
  • The jobs report thus shows the US economy nearing full employment when inflation is already well above the Fed’s 2% target.
  • The risks of a March start to rate hikes - versus our view of June - will raise volatility in the near term. But the Fed is set to only lift interest rates quarterly to the benefit of risk assets this year.

On Friday, the S&P 500 fell 0.41% and 10Y Treasury yields rose to 1.76% after December’s US payrolls report increased the risk of the Federal Reserve starting to raise interest rates as soon as March.



Payroll increases were lower than expected at 199,000 but revisions added 141,000 gains to earlier months. The US economy is still 3.5 million jobs short of pre-pandemic levels as the first chart shows. The second chart also shows labour force participation at 61.9% remains well below it 63.4% rate at the start of 2020. But unemployment is falling fast as the US recovers from the pandemic with the jobless rate down from 4.2% to 3.9% last month. Thus, December’s jobs report shows the economy is near full employment when inflation is already well above the Fed’s 2% target.



The risks of a March start to rate hikes were stoked earlier by December’s Fed meeting minutes noting interest rates may need to be lifted sooner when quantitative easing ends to tame inflation. As the last chart shows, US bond yields have surged with 10Y yields rising from 1.51% to 1.76% this year, threatening a belated taper tantrum.



We anticipate the Fed will start increasing its fed funds rate from 0.00-0.25% in June after it tapers and ends its quantitative easing in March. We will review our forecast this week after Fed Chairman Powell testifies to Congress and December’s US inflation data is released. But we expect the Fed will only hike rates once a quarter this year when it does begin its tightening cycle, a slow pace that would still keep risk assets supported.


This article was first published by Bank of Singapore on Jan 10, 2022. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Bank OCBC NISP Private Banking Tbk. or its affiliates.

OCBC NISP Private Banking provides a suite of products for wealth creation, preservation and transmission including holistic wealth management services, independent research, customized solutions for all investor preferences, and genuine open architecture, with expertise in Indonesia and Asia Pacific markets. OCBC NISP Private Banking is a part of OCBC Group.

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