The Federal Reserve is being put to the test by the labor market.
Fed Chairman Jerome Powell, along with his colleagues from the central bank, have stated many times in the last few weeks that the decision on the next interest rates was an open issue that would be determined by new information regarding the direction of the economy. They claimed that the next step wasn’t predetermined but rather “data-dependent.”
Many Fed officials, including the chairman, would prefer a pause during the Federal Open Market Committee meeting a week from now. Their biggest challenge has been convincing the markets that a pause is not a sign of upcoming cuts. Fed Governor Christopher Waller coined the term “skip” in reference to the idea that rates could be held steady at the Fed’s next meeting, and then raised at the following meeting.
Markets have been hard-pressed to accept this, because the past has shown that the Fed will usually cut rates when it stops raising interest rates. This is for a good reason. The Fed should continue to raise rates if it is not confident that the economy has cooled enough to bring inflation closer to its target. Why would the Fed signal that it will continue to raise rates if they are confident inflation is heading towards the target? It’s a strange inconsistency to plan a pause while also indicating that more rate hikes will be needed.
The official reason for the pause appears inadequate. Fed officials paraphrase Milton Friedman’s lesson that monetary policies have long and variable delays. It’s true. But it’s hard to see what could be gained from a month-long pause, or even several months of keeping rates the same. Are there really so many new details to be expected from the June meeting of the Federal Reserve? If you’re going to hike this summer, why not hike now?
The Fed has had a serious problem with its claim that the rate decisions at each meeting would be based on data. The amount of data available between meetings is insufficient to justify any policy. It is more important to look at the trend over time in different data series.
The May job numbers pose a significant challenge to the Fed. The Labor Department reported that the economy added 339,000 new workers to payrolls of businesses in May. This was far more than anticipated. The job growth has also accelerated, which indicates a rising demand for employees. The numbers for the previous two months, which were already hot, have been revised upwards by 93,000.
Remember that unemployment claims have been flat for the last six weeks, which indicates that employers are not laying off workers at an increasing rate. The latest Job Openings Survey shows that the number of job openings has risen above 10.1 millions. Construction spending has increased. The personal consumption expenditure price-index, which measures inflation, has increased, both on a monthly and year-overyear basis.
If the Fed truly relies on data, then it will raise rates at its next meeting. If the Fed fails to raise rates, it will undermine its commitment to making decisions based on data. The Fed may try to delay or even skip hikes while making a hawkish economic forecast, a press conference, and a hawkish statement. This would put a great deal of pressure on the Fed’s ability to let rhetoric overshadow actual policy.
Not so long ago, the business press was full with stories about how the next recession would be called a “shecession,” which would mean a recession that would affect women the most. In reality, the exact opposite has happened. The women’s unemployment rate is 3.6 per cent, which is below the men’s rate of 3.7 per cent and near the multi-decade record low of 3.3percent. The participation rate of women in prime age has reached a record high of 77.6 %