As we’ve noted, the upcoming presidential election is unlikely to have a lasting effect on the direction of the stock market. The Federal Reserve, however, should continue to have an outsized impact, and will come into renewed focus after the election.
As we approach 2017, the Fed will watch the jobs market for signs of overheating that could lead to higher inflation. As long as there are plenty of Americans looking for work, wage growth and inflation should stay low. However, if the economy continues to grow and the number of available jobs outstrips the supply of available workers, businesses will be forced to raise wages and inflation will rise.
Today, more Americans are working, yet the unemployment rate has stopped falling (chart). This suggests that although more people are employed, new people are entering the work force to look for a job. That keeps a lid on wages and inflation.
The question for the Fed is how much longer the economy can grow before it runs out of new workers, leading to higher wages and inflation.
Higher wages are good news for working Americans, but higher inflation would mean more interest rate hikes and stock market volatility.
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