The Fed is playing catchup, thanks to the ever-changing economy and pandemic.
That they’re in the role of the proverbial tortoise, in an existential race versus hare-raising inflation and stubbornly persistent unemployment, is a no-brainer.
The only question is, will the world’s largest and most advanced central bank recover to overtake events of great consequence — or will those economic trials and tribulations force a reckoning, namely:
Is the Federal Reserve still relevant?
By Dave Allen for Discount Gold & Silver
The Fed is playing catchup, thanks to the ever-changing economy and pandemic.
That they’re in the role of the proverbial tortoise, in an existential race versus hare-raising inflation and stubbornly persistent unemployment, is a no-brainer.
The only question is, will the world’s largest and most advanced central bank recover to overtake events of great consequence — or will those economic trials and tribulations force a reckoning, namely:
Is the Federal Reserve still relevant?
About Face
Just a few weeks ago, the Fed suddenly pivoted toward a more hawkish monetary policy stance after years of chilling like a flock of doves.
And by the end of last week, multiple datapoints coupled with policymakers’ posturing after December’s FOMC meeting were pointing toward an even faster tapering of unprecedented stimulus.
In particular, there was Clueless Jay Powell (not to be confused with Shoeless Joe Jackson!), who said, "Moving forward, the end of our taper by a few months is really an appropriate thing to do.
“…We don’t have a strong labor force participation recovery yet and we may not have it some time. At the same time, we have to make policy now and inflation is well above target, so this is something we need to take into account.”
As Kate Marino writes, cheap money has become the apple pie of the economy since the days of the Great Recession; i.e., it’s been “baked in.”
From 2014-2018, when the Data-Driven Diva herself, Janet Yellen, became Fed chair, the effective Fed Funds rate ranged from 0.07% when she took to the stage to 1.42% when her concert was over.
At the same time, the Fed’s balance sheet ranged from $4.102 to $4.421 trillion, an increase of $319 billion (or 7.8%).
Over the subsequent 4-year reign of Lord Powell, rates have ranged from 1.42% when he assumed the throne to a high of 2.45% in May 2019 back down to 0.07% on 12/31/21.
And, of course, the balance sheet has gone on an unprecedented binge during his time at the helm — nearly doubling from $4.421 to $8.766 trillion, an increase of $4.345 trillion (or 98.3%).
When the Fed’s momentous decision to take all the QE away — after over a decade of businesses and consumers alike feeding at its gratuitous trough — even more volatile swings in markets will result, spilling even greater uncertainty over into the economy.
Jobs vs. Wages
Yes, Friday's lower-than-expected jobs data are in many ways Exhibit A. Early headlines focused on soft growth in payroll numbers (199,000 vs. expectations of 422,000).
The Labor Department’s latest monthly report points to a quirky labor market that’s unusually tight, exacerbating already high inflation (last reported to be 6.8% annually).
And now, the headline unemployment rate is down to 3.9%. In the last economic cycle, that level wasn’t hit until May 2018 — when the Yellen and Powell-led Fed had already raised interest rates six times.
Never mind that the more accurate jobless rate, as measured by the government’s U-6 rate (which includes discouraged workers and Americans who can’t find full-time jobs), is 7.3% (see chart above).
That figure is still down 38% from 11.7% a year ago and is down 68% from its pandemic-high of 22.9% last April.
Perhaps more importantly, it’s closing in on its pre-pandemic figure of 7% in February 2020.
But now, wages are going up at a much faster pace than expected. Average hourly earnings rose 4.7% over all of 2021 — but at a 6.2% annual rate in the 4th quarter of the year.
A simple way to look at the monthly jobs numbers is to look at whether employers added a lot of positions to their payrolls (good) or not (bad).
But Marino says “which numbers matter most depends on the economic moment.”
For example, job growth numbers tend to be useful for detecting when the economy is falling into recession.
Right now, with inflation as the utmost concern, indicators of labor market tightness — like the unemployment rate — are most likely to get the Fed's attention.
One Wall Street analyst notes, "No matter how you slice the data, it’s hard to avoid the conclusion that the labor market is very tight."
Futures markets agree and are now pricing 70% odds of a March rate increase, according to CME Group — up from 36% just five weeks ago.
However, while the labor market at large appears to be healing faster than other parts of the economy, the improvement isn’t equal.
The unemployment rate among Black Americans actually rose 0.6 percentage points in December, to 7.1%. That will present a unique challenge for Powell and other Fed leaders who have said their goal is to achieve broad and more inclusive prosperity.
Will the Fed Actually Hike Rates Soon?
So, with the labor market having gotten tighter — a lot faster than the Fed and other analysts thought possible just a few months ago — will monetary policy changes follow suit…and, more importantly, when?
If news last week added fuel to the market's expectations for a March rate hike, this new week may all but confirm it.
Sir Jay heads to the Senate tomorrow morning for a highly anticipated hearing to confirm his proposed second term. It's not a policy hearing per se, but many are looking for Senators on both sides of the aisle to grill him about the Fed’s changing views on inflation and employment.
The last straw for continuing the loose policies may be the December inflation figures, due out Wednesday (CPI) and Thursday (PPI) this week.
Even if monthly price growth eases, the annual gains may still provide worrisome headlines, not to mention their impact on household pocketbooks.
Economists' median expectations are for headline CPI growth of 0.40% during December, and 7.1% for the year — up from 6.8% a month ago.
Producer — or wholesale — prices will also give us a glimpse into the potential for future prices hikes that'll be passed on to consumers.
The last PPI reading, for November, was the highest recorded for annualized growth since being established in 2010 — at 9.6%. It was an astounding 26.5% for processed goods for immediate demand — the biggest increase since 1974.
The Fed’s Open Market Committee next meets January 25-26. All eyes and ears will be tuned into Powell’s press conference right after the meeting is adjourned.
Then, we’ll have a better idea then where the tortoise stands (i.e., just how relevant it is) in this ongoing race with this hare-brained economy.