Key Highlights

● Warsh called labor market conditions "quite positive" at his Wednesday press conference.

● He said Americans are still dealing with Inflation above the committee's objective.

● Third-quarter GDP accelerated sharply and beat forecasts on Thursday.

● The Employment Cost index on Friday is the next look at wage pressure.

Fed Chair Kevin Warsh offered an upbeat assessment of the Job Market on Wednesday, a description that helps explain why the Central Bank is focused squarely on inflation.

The phrase

At his press conference following the Fed's decision on Wednesday, October 28, Kevin Warsh described labor market conditions as "quite positive," according to media reports. In the same breath, he noted that Americans are "still dealing with inflation that has been running above the committee's objective."

Those two observations, side by side, sum up the Fed's dilemma. When jobs are plentiful and inflation is high, the case for keeping policy restrictive, or even tightening further, grows stronger.

Why a strong job market matters to the Fed

The Fed has a dual mandate: maximum employment and stable prices. When Unemployment is rising, policymakers face pressure to support the economy. When the labor market is healthy, they have more freedom to focus on inflation without worrying that higher rates will throw large numbers of people out of work.

By calling conditions "quite positive," Warsh signaled that the employment side of the mandate is not the binding constraint right now. That leaves inflation as the main concern.

He also cautioned against policy that would "throw sand into the gears of the economy," according to one research report, which noted it could not verify the quote against a transcript. Taken together, his comments suggest a Fed that wants to restrain inflation without derailing a solid economy.

The data behind the optimism

Thursday's numbers backed up the upbeat view on activity. The advance estimate of third-quarter GDP showed growth accelerating sharply from the second quarter and beating forecasts, with consumer spending holding up well and Business Investment soaring, according to market data.

Consumer strength usually rests on jobs and paychecks. Mastercard (NYSE:MA) beat expectations on Thursday, with adjusted Earnings of $5.31 a share against $5.17 expected, a sign that spending power remains intact.

The Fed's own statement described economic activity as "expanding at a strong pace," up from "solid" previously, according to media reports.

Inflation is the other side of the coin

A hot job market can feed inflation through wages. September's PCE report, released Thursday, showed headline inflation heating up from August, with Core Inflation also edging higher, according to market data.

"It's our responsibility to get inflation down," Warsh said, according to media reports. The Fed held rates steady by a 10–2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of a hike.

That combination has pushed markets toward a December move. Futures pricing showed a hike as the likely outcome, according to media reports, though one source noted another report that expectations leaned toward a pause.

The market's reaction

Stocks were split on Thursday. The Dow fell 132.54 points to 52,342.56 and the S&P 500 lost 23.59 points to 7,720.39, while the Nasdaq Composite tumbled 365.13 points to 26,184.72 as Alphabet (NASDAQ:GOOGL) sank. Yet the Russell 2000, home to many domestically focused companies that depend on a strong economy, climbed 28.71 points to 2,859.22.

That small-cap strength fits Warsh's description. Companies tied to American consumers and businesses tend to thrive when the labor market is healthy.

What to watch

Friday's third-quarter Employment Cost Index offers the next look at whether a positive labor market is translating into wage pressure. Rapid gains in compensation would reinforce the Fed's inflation concerns, while moderate gains would suggest the job market can stay strong without overheating.

Beyond Friday, upcoming jobs and inflation reports and the December 8–9 Fed meeting will show whether "quite positive" remains the right description, and whether it leads to another hike.