Why The Fed May Continue Raising Interest Rates Until Companies Stop 'Hoarding' Workers

On Thursday, U.S. weekly jobless claims dropped to just 190,000, and that could be bad news for investors hoping for a Fed pivot by the end of the year.

Strong Labor Market: Bank of America analyst Ethan Harris said Friday the four-week jobless claims average of around 206,000 indicates an incredibly strong labor market given the overall economy has been steadily slowing. In fact, Harris said the labor market is stronger now than it was at the peak of previous labor market booms.

Related Link: Fed Beige Book Warns Of 'Little Growth In The Month Ahead,' Sends Markets Lower

One reason why the labor market is so tight is that companies appear to be "hoarding" workers by delaying layoffs until they are absolutely certain the economic slowdown is more than just a brief dip.

Harris said many companies are still traumatized by extreme staffing shortages that occurred in the last two years. Companies were forced to navigate a difficult environment of high employee turnover, qualified worker shortages and elevated training and retention costs.

Why It Matters: Harris said the labor market strength is unsustainable, and the Federal Reserve is likely monitoring the situation closely.

The Fed will likely not stop raising interest rates until the job market normalizes with a higher unemployment rate, fewer job openings and healthy hiring and firing numbers, the analyst said.

Specifically, Harris said weekly jobless claims should be in the high 200,000 range.

"Absent movement in that direction, we are likely headed for an extended, rather than brief, period of 25 bp rate hikes," Harris said.

Related Link: Nasdaq Seeks 8-Day Win Streak As JPMorgan Warns Investors: Don't Be Fooled By Rally

Benzinga's Take: The bond market is pricing in two more rate hikes in the cycle, a 0.25% hike in February and another in March.

If Harris' prediction is correct and the labor market doesn't normalize, interest rates could rise even higher throughout the year, pressuring earnings and likely weighing on the SPDR S&P 500 ETF Trust SPY.

Photo via Shutterstock.