US labour market data indicates that the Federal Reserve is likely to maintain its monetary easing policy, a move that could have implications for bond markets.
Aggregate growth in the US remains robust, driven by the ongoing AI buildout, which is fuelling capital expenditure and enhancing productivity. The consumer remains in a relatively healthy position, supported by positive wealth effects from rising equity prices and sustained real wage growth. Looking ahead to 2026, growth is expected to remain resilient, bolstered by loose financial conditions, anticipated rate cuts, fiscal support from Trump’s tax reforms, and diminishing tariff uncertainties.
However, the benefits of this growth are unevenly distributed, which may prompt the Federal Reserve to continue easing monetary policy towards more neutral interest rate levels. While the labour market has become more balanced compared with its previous tightness, younger workers have been disproportionately affected. Youth unemployment (those aged 20–24) has risen to 9.2%, up from 5.5% two years ago. This trend reflects the impact of the AI-driven shift, as companies prioritise efficiency gains over new hiring.
Although real wage growth remains positive overall, the lowest income quartile has not shared in these gains. According to Atlanta Fed data, nominal wage growth for this group has been flat, translating into significant real wage declines since the pandemic-induced inflation surge. In contrast, the highest income quartile has enjoyed low double-digit nominal wage growth, sustaining aggregate consumption but exacerbating income inequality.
A sluggish labour market
It is important to note that the Fed’s mandate focuses on inflation and employment, not growth. As such, even if GDP grows near its potential, labour market softness – particularly among lower-income and younger workers – could compel the Fed to further ease its policy. New York Fed President John Williams recently highlighted the financial constraints faced by lower-income households, contrasting their struggles with the wealth gains of those benefiting from the stock market boom. He believes this divergence could dampen confidence and consumption amongst those living ‘paycheck to paycheck’.
Furthermore, the Fed has previously acknowledged the role of inequality in its policy decisions, with former Chair Janet Yellen emphasising the importance of addressing income and wealth disparities. We therefore conclude that this backdrop warrants holding interest rate duration within fixed income portfolios, as the Fed will focus on supporting the labour market despite strong overall growth numbers. This should be coupled with credit exposure and a focus on areas we would describe as ‘quality income’, such as BB bonds, AT1s and CLOs which offer superior income relative to traditional investment grade.
The views and opinions expressed by fund managers (internal or external) may differ from the house view. They are shared for informational purposes and do not constitute investment advice or a recommendation.
