Strong Economy, Inept Fed Policy

Expect Powell to Pivot Again on Rates

“Why does a strong economy need such massive stimulus?” asked SriKonomics on September 21 after the Federal Open Market Committee decided to lower the policy rate by 50 basis points. That question came up again and again with various data releases last week, most importantly with yesterday’s jobs figures. Every piece of Friday’s BLS report screamed that the Federal Reserve Chairman had jumped the gun yet again in suggesting in his speech on September 18 that the Federal Open Market Committee had shifted its focus from prices to jobs.

The inflation question is not resolved, and the employment picture remains strong, thank you!

First for some numbers. The 254,000 jobs created in September vastly surpassed the 150,000 that had been anticipated. Suggesting that this was not a fluke or a result of special circumstances, employment numbers were moved up in each of July and August, with the number of jobs created during those months revised up by 72,000. In another sign of strength, the labor force participation rate stayed at 62.7% for the third month in row. In other words, the reduction in the unemployment rate last month to 4.1% from 4.2% was not achieved by putting workers out of the labor force. Especially gratifying was the jump in participation rate for African American workers from 62.7% to 62.9%.

Even before Friday’s numbers, we had a foretaste of what was to come from other signs of economic strength. The Bureau of Labor Statistics’ JOLTS report released Tuesday showed that there were 8.04 million job openings in August, up from 7.71 million in July. The consensus had anticipated no change. ADP numbers told us Wednesday that 143,000 private sector jobs were created in September, up from 103,000 in August. Finally, on Thursday, we learned from the Institute for Supply Management that the Services PMI surged last month, posting the strongest growth since February 2023. Services account for the bulk of the US economy.

Even as we got indications of labor and overall market strength, we received warnings that inflation is not dead. The price of oil spiked last week. Brent crude, quoted at $70 per barrel at the beginning of last week, went over $78 at week’s end — a more than 11% increase in just five days. SriKonomics has been warning (for example, here) about the inflationary consequences of a destruction of oil fields due to the various conflicts in the Middle East. The potential for such damage is what is propelling energy markets upward following a recent escalation in Israel - Iran tensions. Recall that the falling retail price of gasoline has been an important factor in lowering US inflation in recent months, and this is at risk of being reversed.

BLS numbers yesterday also showed that the increase in average hourly earnings had accelerated to 4% in September compared with a year ago. Furthermore, the increase in August compared with a year earlier was revised up from 3.8% to 3.9%. Wage growth running well ahead of inflation is still very much a reality!

All of the above begs the question: What led Powell to his recent conclusion that inflation was coming down gradually to the Fed’s 2% target, and that it is time to switch his attention to jobs? While he has repeatedly cited the experience of the 1970s that he would like to avoid — inflation coming down only to pick up again — it appears he and his colleagues learned little from that experience.

Do not expect Powell to do a mea culpa at forthcoming public pronouncements as signs grow of a renewed rise in inflation. That is not his style! More likely, he will provide another version of his “transitory inflation” explanation, and walk away from the problem calling the pickup in prices “unexpected.” He has done both in the past.

Unfortunately, the public may not have as easy an exit from the issues as the Chairman of the Federal Reserve.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

October 5, 2024

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