Early test for Kevin Warsh: What the strong jobs report mean for Fed policy

The recent surge in job growth raises the chance of Fed rate hikes and presents an early test of new Fed Chair Kevin Warsh's ideas. The probability of a rate hike in December is now 70%, up from 44% before the jobs report, with a 52% chance of a second hike within a year.

Steve Liesman

Kevin Warsh

My view of inflation is different from some. I don't think inflation comes about when the economy grows too much or hardworking Americans get increases in their wages. Inflation is a function of Fed policy being too loose and the government spending too much money.

His colleagues on the Fed don't disagree with that, but they add that an overheating economy running above potential is also a source of inflation relative to where Fed policy is set.

There may be an opportunity to test whether a hot economy doesn't necessarily mean it's inflationary, though it's hard to do during a war because other things are inflationary. Could we have a lot of productivity and let things run hot if the war were over?

Joe

Higher productivity also raises the neutral rate. It's an important question for the market why rates are running higher—whether because the economy is hot with strong growth, or because of inflation. You can have strong productivity, raise the neutral rate, have higher rates, and the market will still do well.

The market didn't like what it saw on Friday, but today it's a little more chill.

Steve Liesman

The higher rate is a global phenomenon. Is it from oil, or something else we all share that's causing it around the world?

Joe

There's an awful lot of debt out there. When rates rise, the ability to service that debt becomes much more expensive, creating a vicious circle. For the U.S. we'll always be able to service our debt, but for other countries maybe less so. Supply is always an issue somewhere in the equation.

Eventually we're going to have to start thinking about that in a big way.

Steve Liesman

Is globalization splintering, and does that have any impact on rates around the globe?

Becky

Globalization is really a deglobalizing world where countries are trying to make sure they have certain supplies domestically. That means financial flows are probably lessening on the global scale, leading to less connectivity. The higher rates we've seen is a global phenomenon, but the extent to which financial markets are deglobalized is only modest at this point, especially with oil prices ricocheting through the world.

Over time, if we go on this route, there is going to be more deglobalization in financial markets, but we're a ways away from that yet.

Steve Liesman

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