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Is the Fed Fighting Inflation, or Fighting Jobs? [1]

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Date: 2023-04-07  

Screenshot from Google "March jobs report" (accessed April 7, 10am US EDT). Annotations by the author. Headline writers seem honing in their descriptors of today's jobs report toward "hot, but cooling" or something...

I wanted to gift a decent story in the NYT this morning called “Wages May Not Be Inflation’s Cause, but They’re the Focus of the Cure.” While this article isn’t perfect — I still hate it when writers and editors describe the last 12 months of data in the present tense, rather than the past tense — but it raises the right question: Is the Fed fighting inflation or labor? This follows a great guest essay in NYT last week called “The Fed’s War on Inflation Is a Class War,” by Bryce Covert (again, the link is gifted for non-subscribers).

My argument is pretty simple: I think inflation has cooled to reasonable levels since the shock of Putin’s invasion of Ukraine. Although measures vary, U.S. prices seem to me to have risen by roughly 3.5% over the last 8 months (expressed at an annual rate). The media, including today’s NYT article, still reports inflation “is” 5-6% depending on the measure, which includes the very high inflation months March-June 2022 just after the invasion. This confusion over what inflation “is” vs. what inflation “was” helped drive the pundit class to demand sudden and large interest rate hikes in 2022, which are only now rippling through the real economy. Combined with the continuing shock of the pandemic, the impacts or these rate hikes will be large and uncertain on banks, commercial real estate (also affecting banks), and small businesses needing finance (disclosure — my family’s business is in the latter category).

Here’s a chart on how interest rates have changed. The red (higher) and green (lower) figures are in basis points or hundredths of a percent. Interest rates have fallen over the last month, particularly in the 1-10 year durations, mostly because the financial markets are realizing that the Fed probably overshot in 2022 and will probably stop raising short term interest rates much more this year. Of course, it wasn’t concern for labor that slowed the Fed down — it was banks starting to fail!

Screenshot from www.bloomberg.com, accessed April 7, 2023 about 10am US EDT. Annotations by the author.

I still blame Larry “Jabba the Economist” Summers and others in my profession for being far too sure of themselves last year. Summers and others were essentially saying that the Fed needed to raise interest rates far enough to eliminate millions of jobs in order to tame inflation. I think that’s bullshit, and we need to wait and see how the economy continues to adapt to the aftermath of pandemic and the war in Europe before making such dramatic conclusions about what the economy needs or doesn’t need.

After all, the U.S. labor force has only recently returned to pre-pandemic levels (see chart below).

Source St. Louis Fed FRED data system, accessed March 31, 2023.

Fed Open Market Committee hear my plea! Don’t use monetary policy to fight labor until we really know whether inflation is likely to persist, and whether labor is really the cause.

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[1] Url: https://www.dailykos.com/stories/2023/4/7/2162629/-Is-the-Fed-Fighting-Inflation-or-Fighting-Jobs

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