Investors are rooting for a continued slowdown in wage growth and a loosening in the tight labor market but not an outright recession, which would hamper corporate profits. Wages are still rising too quickly for the Fed’s comfort and aren’t compatible with its 2% annual inflation goal. Workers, however, benefit from higher wages, as many have not kept pace with the spike in prices.

The market had a banner year in 2021, with the S&P 500 Index advancing over 25%, according to data from the St. Louis Federal Reserve. But tailwinds that fueled gains in some sectors of the S&P 500 shifted dramatically in 2022.

Powell said rates are still not high enough. “We'll need to stay there (at a yet-to-be-determined peak) until we're really confident that inflation is coming down in a sustained way. And we think that will be some time.” That wasn’t pivot language. It wasn’t pivot lite. It wasn’t even a pivot with a small ‘p.’

It doesn’t happen often (recessions don’t happen often), but it suggests that investors believe short-term rates are headed lower. Maybe not today, but weaker economic conditions would be expected to force the Fed to cut rates. When that has happened in the past, short yields fall faster than longer yields, and the curve normalizes. While it has been a reliable predictor, it has not done a good job of pinpointing the start of a recession.

Can there be too much hiring? Can job growth be too fast? It seems like an odd question. But following a better-than-expected jobs report on Friday and the initial negative reaction (shares pared losses and finished mixed), the question is worth exploring.

Congress’ response to the pandemic was to flood the economy with cash, including generous jobless benefits, tax credits, and stimulus checks. The extra cash boosted spending, but not all has been spent.

The Fed may dial back the size of its rate increases—75 bp increases began in June—but the peak in the fed funds rate, what analysts are calling the terminal rate, could be higher than previously expected. And the Fed could maintain that level for a while.