Brown on Business
May 31 - June 6, 2021
Fed holding off higher interest rates until employment target reached, inflation cools
By Wesley Brown
wesley@dailydata.com
When it comes to the Federal Reserve’s Open Market Committee possibly flirting with raising near zero-level interest rates, the nation’s chief monetary policymakers guide their decision making by keeping a close eye on U.S. employment levels and inflation.
And although the FOMC has a full range of tools to monitor health of the nation’s labor pool and inflation, the monthly U.S. Employment Situation and Consumer Price Index are the key components of the Fed’s two-legged stool approach that draw the most attention.
Released each month by the Labor Department’s top-notch Bureau of Labor Statistics’ research group, both closely watched reports engender the attention of top Wall Street economists each month trying to figure out which way the world’s largest economy is headed.
For instance, the U.S. stock market saw a huge selloff on May 7 when BLS reported that the U.S. jobless rate at 6.1% and 266,000 new nonfarm employment added to the civilian labor pool. Compared to a year ago when the U.S. employers laid off over 20 million workers due to deteriorating business conditions caused by COVID-19 shelter-in-place mandates, the Biden administration was both encouraged and cautious.
The good news, according to U.S. Secretary of Labor Marty Walsh, is that labor force participation is at its highest point since last August as the number of people expressing hesitancy about returning to work due to the coronavirus is at its lowest point in the pandemic.
“However, the numbers also show we have a steep climb ahead of us. We have yet to recover roughly eight million jobs that existed prior to the pandemic,” said Walsh. “Racial inequities in the unemployment picture persist, as the Black unemployment rate increased slightly to 9.7%, the Hispanic rate held level at 7.9%, the Asian rate dropped to 5.7% and the white rate fell to 5.3%.”
The bad news is that the 266,000 job adds in April were well below Wall Street expectations following robust increases of 770,000 in March and 536,000 in February. What caused concern in global financial markets was that top economists surveyed by Bloomberg had forecasted a strong 1 million new jobs would be added to payrolls. One economist at New York City-based Jefferies investment firm even went as far as predicting more than 2.1 million jobs for the month.
Once the new numbers were released, the disappointment was palpable and critique swift. Michael Madowitz, economist at the left-leaning Center for American Progress, offered his take on the disappointing employment numbers that have adversely impacted women workers.
“(The) announcement that the economy added 266,000 jobs last month underscores that, while the economy is in recovery, it is not recovering quickly enough. After a week of anecdotes about labor shortages, the data tell a very clear story that any worker shortage is due to fewer women in the labor force,” said Madowitz. “All labor force growth this month came from men, while more women dropped out, likely due to the fact that the nation’s care infrastructure does not meet the needs of millions of families.”
Although not as closely watched as BLS’s monthly U.S. unemployment report, the CPI has seen its star rising in 2021 as the U.S. economy emerges from the COVID-19 pandemic. But not always for good reasons.
As the key barometer for inflation, the CPI measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. Through April, every single item in most consumer’s shopping baskets has skyrocketed during the pandemic except for medical supplies.
For example, the nation’s top inflation barometer shows all urban consumer goods increased 0.8% in April after rising a robust 0.6% in March. Over the last 12 months, the CPI’s “all items” index increased 4.2%, which is the largest yearly increase since a 4.9% spike in September 2008 at the height of the Great Recession.
Among other things, the index for used cars and trucks rose 10% in April, the largest 1-month increase since the series began in 1953. The food index also rose in April by 0.4% as the category for groceries at home and takeout and restaurant food both increased. The energy index was the only category that saw a modest decline as lower costs for electricity and natural gas more than offset rising pump prices.
In view of those key economic reports and as the Biden administration has seen major progress on vaccinations and strong policy support at the local, state, and federal levels, the Federal Reserve noted at its last meeting on April 29 that key indicators of economic activity have strengthened.
“The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses,” Federal Reserve Chair Jerome Powell said in a statement. “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.”
Powell added that although inflation is rampant across the economy, it had been running persistently below the Fed’s longer-run goal of 2% in the years ahead of the pandemic. He also said the FOMC’s goal is to achieve maximum employment over the longer run. With the nation’s jobless rate still well above the 3.5% going into the pandemic and about 11 million still out of work, that goal still has a way to go.
“The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved,” said Powell. “The Committee decided to keep the target range for the federal funds rate at zero and 0.25% and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
What that means for the foreseeable future is that consumers should get used to inflated prices on everyday goods like food and gas to big ticket items like a new car or house. In fact, when millions of travelers hit the road this Memorial Day holiday, they will get a personal lesson in inflation when they see how the recent spike in used car prices has caused rental car rates to jump as high as 700% in some urban markets. Hotel rates, airline fares and other travel costs have also more than doubled from a year ago.
The good news is that the FOMC is likely to hold off raising interest rates until employment and inflation are stable again, probably sometime in early 2022. With recent reports showing that home prices nationally are also up 20% from a year ago, maybe by that time employers will be giving raises again or at least paychecks will go a little bit farther.
