If Federal Reserve policymakers are sincere about wanting to achieve their stated goal of maximum employment, they’ll have to stop ignoring the economic realities before their eyes.
The April jobs report, which showed just a fraction of the job creation forecast, was a bucket of cold water on the narrative that policy is correctly calibrated, though most of the blame fell on government spending measures rather than monetary policy.
The report that new jobs were just 266,000 last month instead of the nearly 1 million expected immediately became a political football as Republicans blamed excessive unemployment benefits for discouraging new hires and Democrats claimed the data shows there is still a lot of economic uncertainty after a year of pandemic lockdowns.
Jobs Report Might Be Outlier; Upcoming CPI Could Tell Different Story
So what is the economic reality? That will become a lot clearer with Wednesday’s inflation report. If inflation, as measured by the consumer price index, is running above the 0.2% month-on-month consensus forecast, it will certainly tilt the employment argument towards those who say jobs are there but people prefer to earn more money by staying home and collecting bonus benefits.
If the producer price index on Thursday, a leading indicator for the future CPI trajectory, also shows an upward trend, that will lend credence to the anecdotal detail from earnings reports.
Companies are complaining they can’t hire enough workers. That should mean wages and prices are rising as companies fall short of consumer demand even though they are boosting wages to lure employees.
Members of the Federal Open Market Committee followed the party line last week ahead of the jobs report. Fed Governor Michelle Bowman, who is on the board as a representative of small banks, gave one of her rare speeches on monetary policy and it toed the line—optimistic about the economy but cautious about uncertainty from the pandemic.
“We’re still a long way away from our goals, and in our new framework we want to see actual progress, not just forecast progress,” said Vice Chairman Richard Clarida, echoing the steady refrain from FOMC members. He wants to wait on data; he’ll get some this week.
Chicago Fed chief Charles Evans expressed his enthusiasm for the economy running hot, saying maximum production is a good thing. He wants the burden of proof to be on those who fear inflation and calls on them to quantify “exactly what kind of numbers” they are talking about.
Boston Fed President Eric Rosengren said inflation increases will be temporary, comparing bottlenecks to the toilet paper shortages a year ago when the lockdowns first went into effect.
The worry among economists is that the Fed will keep its head buried in the sand until an overheated economy and rapidly increasing inflation force it to take drastic action, which could plunge the country into a recession.
Treasury Secretary Janet Yellen, a former Fed chair, let the cat out of the bag Tuesday in a pre-recorded interview for the Atlantic, saying “it may be that interest rates will have to rise” if all the administration stimulus plans are approved. She walked that back as quickly as she could at another event the same day, saying she doesn’t think inflation will become a problem.
A slew of FOMC members will be speaking next week after the CPI report, so it will be interesting to see how they spin the numbers. So far, only one Fed policymaker, Dallas Fed chief Robert Kaplan, has stepped out of line when he suggested at the end of April that the central bank should start a discussion as soon as possible on tapering its bond purchases.
The April jobs report is such an outlier that either side can dismiss it as a one-time distortion. It will be harder to play down a higher-than-expected increase in prices that show an upward trend.