The Fed’s path to a ‘Goldilocks’ economy became more complicated

0 14

A ‘help wanted’ sign is displayed in a Manhattan store window on December 02, 2022 in New York City.

Spencer Platt | Getty Images

As far as jobs reports go, November was not exactly what the Federal Reserve was looking for.

A higher-than-expected payroll number and a hot wages reading that was twice what Wall Street had predicted don’t add to the delicate and tight cycle the Fed must navigate.

In normal times, a strong job market and employee paychecks would be considered high-level problems. But as the central bank tries to stop persistent and problematic inflation, this is too much of a good thing.

“The Fed cannot take its foot off the gas at this point for fear of a rebound in inflation expectations,” Jefferies chief financial economist Aneta Markowska wrote in a post-paid analysis. nonfarm according to most of Wall Street on Friday. “Wage growth remains consistent with inflation at nearly 4%, and it shows how much more work the Fed still needs to do. “

Payouts grew 263,000 in November, well ahead of the Dow Jones estimate of 200,000. Wages rose 0.6% on the month, double the estimate, and 12-month average hourly earnings accelerated 5.1%, above forecasts of 4.6%.

All of these things together add up to an order of magnitude more of the same for the Fed – continued increases in interest rates, even if they are slightly less than the three-quarters percentage point per meeting that the central bank been since June. .

Little impact from policy changes

The numbers would indicate that a rate increase of 3.75 percentage points has so far not had much effect on the labor market situation.

“We’re not really seeing the impact of the Fed’s policy on the labor market yet, and that’s a concern if the Fed is looking at job growth as a key indicator for their efforts,” said Elizabeth Crofoot, senior economist at Lightcast, a labor market analytics firm.

Much of the Street analysis following the report was viewed through the prism of comments made by Fed Chairman Jerome Powell on Wednesday. The head of the central bank explained a set of criteria he was looking for for clues as to when inflation will come down.

These included supply chain issues, housing growth, and labor costs, particularly wages. He also went on to set caveats on a few issues, such as the focus on services inflation without housing, which he thinks will pull back on its own next year.

“The labor market, which is particularly important for inflation in basic services such as housing, is showing only tentative signs of rebalancing, and wage growth remains well above levels consistent with inflation 2 percent over time,” Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.”

In a speech at the Brookings Institution, he said he expected the Fed to cut the size of its rate hikes – the part that markets seemed to hear as reason for a post-Powell rally. He said the Fed would likely have to raise rates higher than previously expected and leave them there for an extended period, and that was the part the market seemed to ignore.

“The November earnings report … is exactly what Chairman Powell told us earlier this week that he was most concerned about,” said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities. . “Wages are rising more than productivity, as the supply of workers continues to decrease. To restore demand and supply of labor, monetary policy must be more restrictive and remain in place for a long time.”

The Road to ‘Goldilocks’

To be sure, all is not lost.

Powell said he still sees a path to a “soft landing” for the economy. That outcome may look something like either a recession or just a shallow recession, albeit accompanied by an extended period of subdued growth and at least some upward pressure on unemployment. .

To get there, however, seems to require almost a storm of conditions: A reduction in labor demand without mass layoffs, continued easing of supply chain bottlenecks, an end to hostilities in Ukraine and a reversal in the movement of housing costs, especially rent.

From a real labor market perspective, that would mean an eventual decline to perhaps 175,000 new jobs per month – the 2022 average is 392,000 – with annual wage gains in the 3.5% range.

There is some indication that the labor market is cooling. The Labor Department’s housing survey, which is used to calculate the unemployment rate, showed a decline of 138,000 in those who said they were working. Some economists believe that the housing survey and the establishment survey, which count jobs rather than workers, could soon converge and show a more relaxed employment picture.

“The biggest disappointment was the strong wage growth number,” Mark Zandi, chief economist at Moody’s Analytics, said in an interview. “We’ve been at 5% since the beginning of the year. We’re not going anywhere fast, and that has to come down. That’s what we have to worry about most about it.”

Still, Zandi said he doubts Powell was too upset about Friday’s numbers.

“While the outlook for inflation, while very uncertain at best, there is a path forward that is consistent with a Goldilocks scenario,” Zandi said. “263,000 vs 200,000 – that’s not a meaningful difference.”

Leave A Reply

Your email address will not be published.