Recent data on the US labour market and inflation will encourage the Federal Reserve to step up the removal of monetary stimulus through this year. The Fed’s inflation objective has clearly been met with headline inflation now at 7% year on year. The central bank is also increasingly aware that the post-pandemic economy looks different to the one before it. The percentage of the US population who aren’t in the labour force and maintain they don’t want a job is growing. This means the pool of Americans who are available for work is smaller and so the labour market has become very tight with more job vacancies than people available to employ. With this backdrop fuelling higher wages and therefore potentially more sustained inflation, we believe there is strong justification for the Fed to deliver a first rate hike at its March meeting.

A smaller labour force has sped up the arrival of a tight labour market

% of US population over 16 years old