The Fed’s Labor Problem
This morning begins the first part of a two-day meeting of the Federal Reserve’s Open Market Committee. A little danish to start? And then the essential ingredient for any successful meeting is plenty of free-flowing coffee, and make that extra strong just in case.
As any of you who’ve been through one of these long two-day meetings will attest, sitting that long in an enclosed room can bring on that drowsiness. And today and tomorrow, the Open Market Committee will need to be extra sharp.
The FOMC is trying to thread one of the most difficult of all financial needles, that balance between full employment and low inflation. Today’s meeting begins, no doubt, with plenty of charts and graphs explaining exactly where this economy stands. Using one of the most extensive economic databases in the country, combined with a research staff that is second to none, the Committee will pour over the latest detailed view of the labor market, as well as the financial conditions of the country.
By mandate, the Federal Reserve, as well as all the agencies and quasi-agencies surrounding the Government, are required to promote full employment and stable prices. The Federal Reserve is the edge of the sword in this battle to keep both measures in line.
The twin mandate was established in the nation’s law, back during a time very much like what we are experiencing currently. It was the 1970s, a time of stubbornly high inflation and, at the same time, stubbornly high unemployment. Economists coined the term “Stagflation” to describe this below-trend economic growth with above-trend price inflation.
Today, we’ll look at the labor markets and the challenges faced by the Fed to maintain, as near as possible, full employment. Tomorrow in part two, we’ll review the problem of inflation.
In January, the Federal Reserve restated its Full Employment and Price Stability policy. In that statement, the Fed goes into excruciating detail on just where their inflation goal lies. In contrast, they are just as definitive in stating that they have no specific employment goals. I quote: “…it would not be appropriate to specify a fixed goal for employment…”
A good tactic if you can get away with it. And the Fed has gotten away with this lack of specificity for more than 40 years. And why not? In the 1970s and 80s, when the full employment law was written, we assumed that full employment was achieved when unemployment reached 5%. Today, unemployment levels are in the 3%s, well below anything dreamed of back in the day.
But currently, two trends indicate that the employment situation is deteriorating.
These trends first appeared during the Covid-19 Pandemic and its aftermath. During three years, from October 2019 until October 2022, there was a sudden and dramatic disappearance of a substantial number of workers. Stay with me; this will take a couple of steps to explain.
In October of 19, we had 159 million people working in this country. In October of 2022, we had the same number of working adults, 159 million. But during that time, the population grew by over 2 million people. Typically, that additional population would have added 1.5 million new workers, but no new workers were added this time. How can that be?
Economists have a measure of this, the Participation Rate, which measures the number of people working versus the entire population. From 2019 to 2022, the Participation Rate declined by 1%. This year we’ve had the same number of workers as three years before, and in November, total employment fell below the 2019 level.
So where are these missing 1.5 million workers? Rather than just sitting at home watching Television, many of these may be too ill to work. We hear stories of some suffering from recurring bouts of Covid, the so-called “Long Covid.” At the same time, others have suffered from the adverse effects of the vaccine. The VAERS, Vaccine Adverse Events Reporting System, currently reports nearly the same number of adverse reactions as missing workers.
At least, it seems plausible that many of these “missing” workers are too ill to work.
So, that’s the worrisome, long-term employment trend.
There is also a short-term trend in the labor market that has only shown up recently. Beginning in the third week of September, less than three months ago, there has been a steady increase in the number of Americans filing continuing claims for unemployment insurance. Not to be confused with initial claims for unemployment insurance, these are out-of-work people who cannot find a new job. It indicates that the labor market is much tighter than earlier in the year.
If you’ve ever filed for unemployment, you know that to collect your benefit, you must demonstrate that you are actively looking for a new job. These people are looking but to no avail.
The Fed must consider all this. Labor conditions are getting tighter. If the Fed continues to raise interest rates, it will put more pressure on those already without a job.
It is up to the Fed to thread that needle. They must navigate between lowering inflation and maintaining American jobs.
Tomorrow we look at part two of the Fed’s jobs, the dilemma of stable prices.
Econ Briefs
The final data point before tomorrow’s Fed Meeting has just flashed across my screen. US Inflation at the consumer level is lower than anyone anticipated. The Consumer Price Index shows inflation of 7.1% on an annual basis. A lower rate than even the most optimistic Wall Street Analyst estimated. Core Inflation, inflation without food and energy, also came in lower than expected at a 6% annual rate.
Wall Street couldn’t be happier with this news on inflation. All the major averages are trading substantially higher an hour before the opening. This report seems to give the Fed the “green light” only to raise interest rates by one-half percent.
In earnings reported this morning, it’s all green, Core and Main, a water distribution company. Photronics, a semiconductor support company, and fashion company Vince Holding are all trading higher on their results.
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