The Federal Reserve’s dual mandate is to promote stable prices and maximize employment. Today, we take a look at how current events are affecting those policy mandates.
Early Pandemic Layoffs Driving Today’s Labor Shortages
One only has to recall the infancy of the pandemic to see why employers in a broad range of industries are struggling with historic labor shortages.
Decisions made in 2020 to cut staff appear to be a root cause of many 2022 frustrations, according to Courtenay Brown and Neil Irwin of Axios.
The industries hardest hit at the pandemic's onset — restaurants, hotels and airlines — are now those seeing a boom in demand.
Even with higher pay, though, they're struggling to replace the workers they laid off back then – some of whom have moved to other industries where the pay is comparable or higher and working conditions are better.
The worker shortage has pushed businesses to raise wages rapidly, which has, in turn, kept inflation elevated.
On the other hand, this dynamic has been more subdued in Europe.
By Dave Allen for Discount Gold & Silver
The Federal Reserve’s dual mandate is to promote stable prices and maximize employment. Today, we take a look at how current events are affecting those policy mandates.
Early Pandemic Layoffs Driving Today’s Labor Shortages
One only has to recall the infancy of the pandemic to see why employers in a broad range of industries are struggling with historic labor shortages.
Decisions made in 2020 to cut staff appear to be a root cause of many 2022 frustrations, according to Courtenay Brown and Neil Irwin of Axios.
The industries hardest hit at the pandemic's onset — restaurants, hotels and airlines — are now those seeing a boom in demand.
Even with higher pay, though, they're struggling to replace the workers they laid off back then – some of whom have moved to other industries where the pay is comparable or higher and working conditions are better.
The worker shortage has pushed businesses to raise wages rapidly, which has, in turn, kept inflation elevated.
On the other hand, this dynamic has been more subdued in Europe.
Economist Paul Gruenwald at S&P Global Ratings observes, "[W]hen the economy rebounded, they could jump back toward full employment with minimal inflation in the labor market."
"In the U.S., we let the market clear, and we have had a really difficult time reassembling the labor market in a non-inflationary fashion."
Euro nations encouraged companies to adjust to the pandemic shock by cutting hours instead of jobs.
By contrast, the U.S. relied on expanded federal unemployment benefits and direct income support, while small firms had labor costs covered through the Payroll Protection Program loans.
Countries like France, Germany, Italy and Spain implemented job retention programs that kept workers connected to their employers.
And today, the eurozone labor force participation rate has surpassed its pre-pandemic level, while the rate in the U.S. has not, particularly in the government sector. The policies encouraged "labor hoarding," says an IMF paper released earlier this year.
The level of job cuts was roughly equal to that of the Great Recession, despite a bigger blow to economic activity. In the U.S., this especially tension stands out in the airline industry.
The PPP prohibited fund recipients from laying off workers, although they could still incentivize workers to leave voluntarily because travel demand remained soft.
Now that demand has boomeranged, the industry is racing to fill that labor gap, with significant staffing shortages fueling long delays and flight cancellations for air travelers.
Airports are understaffed, and major airlines are collectively thousands of workers shy of pre-pandemic levels.
This isn’t to say that Europe isn't immune to labor shortages of its own.
Airports and airlines there, too, are struggling to gear operations and fill all the jobs left open when the pandemic hit.
In the U.K., Brexit fallout is contributing to a reduced labor supply.
In short, Brown and Irwin say that industries' reactions to the economic shock may still be haunting them.
Americans’ Inflation Expectations Influencing Policy
With the Federal Reserve highly motivated to bring high inflation down, how Americans view future inflation levels have become unusually important in shaping policy.
The latest consumer survey offers what Brown and Irwin characterize as “weird mixed signals” with perhaps good news hidden within.
Americans' inflation expectations for the coming year spiked in June, so says the New York Fed's Survey of Consumer Expectations. But their expectations for inflation in the medium- and long-run actually fell.
Gas prices peaked in mid-June, the fact that people are pessimistic about inflation over the next year shouldn’t come as a surprise.
However, headlines also touted more pundits’ seeing a coming recession and the Fed's dogged determination to stamp out inflation (despite that rising risk).
At the same time, it's plausible that consumers started to expect higher inflation in the near term because of rising gas prices while becoming more confident that it will come down in the years ahead.
Survey respondents also pulled back on their expectations for their own household spending over the coming year – now expecting 8.4% spending growth, down from 9% in May.
In that vein, Kansas City Fed Prez Esther George warned this morning that because of a growing discussion of recession, “some forecasts are predicting interest rate cuts as soon as next year."
This suggests to her that the Fed could be raising rates more quickly than the economy can handle.
That's potentially good news for the Fed as it tries to dampen torrid demand in the economy – and good news for consumers and businesses who would benefit from a more cautious, circumspect Fed in the coming months.