Good Is the Enemy of Great

Economic readings to start this year were hotter than expected, with inflation proving persistent and job creation exceeding levels we associate with a steady labor market. In the range of potential economic outcomes, this is not an altogether bad scenario. Inflation may hold higher than we were accustomed to in prior cycles, but if a strong job market allows wage gains to keep pace, it’s survivable.

But these circumstances are not ideal. A runup in inflation is a greater risk from a higher starting point, and the Fed will hesitate to ease as long as inflation holds above the 2% target. We can do better, and we expect the momentum to soften. The labor market is moderating, and inflation is cooling, albeit unevenly. High interest rates are helping to limit excessive spending, while financial conditions more broadly remain favorable to investors.

Following are our thoughts on recent data and developments.