Chart of the Week: Treasury yields rise after US jobs report

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Friday’s US employment report revealed that jobs grew at half the rate that economists predicted in December, while wages increased at a solid monthly clip and the unemployment rate declined from 4.2% to 3.9%, its lowest level since the start of the pandemic. Despite this and other indicators pointing to a tight US labour market, most economists — including those at Fathom — expect inflation to come down this year and next. After all, factors that helped to keep a lid on inflation in the pre-COVID years — technology, globalisation, demographics, inequality, etc — have not gone away. Moreover, we think that the gradual withdrawal of COVID-related fiscal policy will prompt inactive workers to re-enter the labour market, boosting labour supply and dampening wage pressures. But while we expect inflation to come down, it will remain above the Fed’s 2% target this year — and possibly beyond, even though the Fed is likely to increase the federal funds rate at its next meeting in March and stop buying new bonds under its QE programme. With that in mind, it would not be a surprise if the gap between the US Treasury yield and 5-year forward inflation expectation rate began to close, as it did last week. The speed at which inflation comes down will, of course, be key for the monetary policy outlook and markets.