Slowdown in inflation due to wage component of inflation falling. What, didn't you hear that the Fed was very interested in pulling on that lever? Just yesterday Powell complained about the labour market being tight, guess businesses heard him all right.
> Powell complained about the labour market being tight
No, he didn’t [1].
He justified a rate rise in a faltering economy by pointing to the labor market’s strength. Were the labor market weaker we’d be in stagflation and monetary policy would have no room to manoeuvre.
Powell has previously said that he wants higher unemployment. He believes this is the only way to decrease demand and bring down prices.
> The labor market continues to be out of balance, with demand for workers substantially exceeding the supply of available workers. The labor force participation rate showed a welcome uptick in August but is little changed since the beginning of the year. FOMC participants expect supply and demand conditions in the labor market to come into better balance over time, easing the upward pressure on wages and prices. The median projection in the SEP for the unemployment rate rises to 4.4 percent at the end of next year, ½ percentage point higher than in the June projections
> We’re never going to say that there are too many people working, but the real point is this: Inflation—what we hear from people when we meet with them is that they really are suffering from inflation. And if we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.
That is why the market goes down when low unemployment numbers are released. Powell will continue to raise rates until the labor market cools. He's not using the labor market to determine whether or not the economy can handle more rate increases. He's absolutely determined to increase unemployment via rate hikes.
Their goal is to reduce inflation. Increasing unemployment, is a side effect of rate hikes but ultimately, reduces demand for consumer goods thus reducing inflation.
Their goal is to keep inflation steady at a manageable rate, and to prevent any deflation at all. Since inflation indicators haven't been too reliable in the last 20 years, they were caught horribly off guard. But ideally, they would make small changes one way or the other to maintain a nice equilibrium that would keep employment levels relatively stable.
There are a ton of levers (not all under the Fed's purview). This is just how capitalism works though, others must suffer at the expense of capital. It's bad enough when the government doing the bare minimum, like trying to put a bunch of people to work to replace our crumbling infrastructure, gets decried as "socialism". Those voters must not understand (or simply not care) that voting for the same corporate interests over and over again will just lead to the working man sacrificing more to big business.
> has previously said that he wants higher unemployment
He has not. I am open to being corrected with a credible source. But every time I see this conspiracy theory, it’s based on summaries of Fed statements unsupported by the statements themselves.
> is why the market goes down when low unemployment numbers are released
Because the market is anticipating rate hikes. When inflation is low strong employment boosts the market. We just went through a decade of that.
He goes on to say that supply and demand for workers needs to be brought into balance. The goal of raising interest rates is to reduce demand for labor. He says that directly. This isn't a conspiracy theory.
> The labor market continues to be out of balance, with demand for workers substantially exceeding the supply of available workers. The labor force participation rate showed a welcome uptick in August but is little changed since the beginning of the year. FOMC participants expect supply and demand conditions in the labor market to come into better balance over time, easing the upward pressure on wages and prices. The median projection in the SEP for the unemployment rate rises to 4.4 percent at the end of next year, ½ percentage point higher than in the June projections
He's expecting the act of raising interest rates to increase unemployment to 4.4%. He's doing this to bring balance to supply and demand for labor, to ease upward pressure on prices.
He is also asked directly when he will know when to stop:
> So I will answer—I will answer your question directly, but I want to start here today by saying that my main message has not changed at all since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2 percent, and we will keep at it until the job is done. So the way we’re thinking about this is, the overarching focus of the Committee is getting inflation back down to 2 percent. To accomplish that, we think we’ll need to do two things, in particular: to achieve a period of growth below trend; and also some softening in labor market conditions to foster a better balance between demand and supply in the labor market.
He directly says he's waiting to see softening of the labor market before stopping the rate hikes.
> He's expecting the act of raising interest rates to increase unemployment to 4.4%
> He directly says he's waiting to see softening of the labor market before stopping the rate hikes
Yes, because we don’t want to ruin the labor market. Right now, rates can be raised without spiking unemployment. The Fed is trying to estimate when that stops happening.
A clear signal that the limit has been reached is the labor market actually softening. That doesn’t mean the Fed is trying to raise unemployment. It’s trying to lower inflation, and thinks unemployment may rise as a result of that, though to date it has not.
No, that's not what Powell is saying. Read this quote again:
> So I will answer—I will answer your question directly, but I want to start here today by saying that my main message has not changed at all since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2 percent, and we will keep at it until the job is done. So the way we’re thinking about this is, the overarching focus of the Committee is getting inflation back down to 2 percent. To accomplish that, we think we’ll need to do two things, in particular: to achieve a period of growth below trend; and also some softening in labor market conditions to foster a better balance between demand and supply in the labor market.
Powell says (paraphrasing slightly): "In order to get inflation under 2%, we need to do two things. 1. achieve a period of low growth, and 2. soften the labor market." Low growth and higher unemployment aren't simply side-effects of Powell's policy. These two things are explicitly stated goals.
Would it be correct to say the Fed's goal is to lower economic growth? I don't think so. It's trying to lower inflation and predicting negative, possibly necessary, side effects. But if you read that quote as saying the Fed is trying to raise unemployment, then it's also saying the Fed is trying to lower growth, which is an odd reading to say the least.
I think we're arguing over the definition of goal and side-effect.
Let's say I have a goal of running a marathon, so I decide to start jogging every day. Is my daily jogging a side-effect of my goal to run a marathon? I wouldn't say so. Rather, jogging every day is an explicit course I've set out on with the hopes of achieving my main goal. Daily jogging is a sub-goal of the main goal, if you will. This logic can be applied to the Fed. The main goal is to lower inflation, and the chosen course of action (i.e. the sub goals) are to lower economic growth and to increase unemployment.
A side-effect would be something akin to knee pain. I can't jog without hurting my knees, but having pain in my knees isn't something I explicitly set out to do.
A side-effect of Fed policy would be something like the gilt crises in the UK. Higher US rates increase yields on UK bonds indirectly. But that isn't something the Fed is actively setting out to do.
> Let's say I have a goal of running a marathon, so I decide to start jogging every day. Is my daily jogging a side-effect of my goal to run a marathon?
You can't run a marathon without your daily jogs. Inflation can be lowered without spiking unemployment. It's unlikely. Hence the Fed's messaging. But until recently the Fed forecasted a soft landing, i.e. growth and low unemployment amidst rising rates and falling inflation.
Better analogy: engine temperature. You're driving and keeping an eye on the thermometer. You see the temperature is low and so feel comfortable accelerating. The goal is getting to your destination faster. The low temperature lets you accelerate, which in turn raises the temperature. But raising the engine temperature wasn't the point. It reverses cause and effect to say your goal was to raise engine temperature. It wasn't. Engine temperature was simply a limiting factor you were paying attention to.
Using analogies is always dangerous because they're never going to be a perfect fit. But the difference between your engine analogy and the federal reserve's actions is that anemic economic growth and high unemployment is not a side effect. In your engine analogy, adding more gas and air into the engine increases the amount combustion. It's the combustion that increases speed, so in a sense increase combustion is a goal. Released heat is just a by product of the reaction. In the economy, the amount of economic activity and the amount of available labor are what drive prices, so these things are the combustion in the piston, not a byproduct.
> amount of economic activity and the amount of available labor are what drive prices
The relationship is sufficiently complex to permit e.g. falling unemployment, falling (not negative) wage growth, falling (including negative) growth and falling inflation. It's not a deterministic system.
> in a sense increase combustion is a goal
No, it's not, because the goal--reaching the destination quickly--would be accomplished equally well in an electric car with no combustion. That's the difference between a goal and an effect.
Look, I agree that theoretically it’s possible to lower inflation while keeping unemployment low. But the Fed is looking for a causal effect. They want higher unemployment because that will balance the labor supply and reduce wage growth. That’s what the Fed has said. The fact that they’re looking for a causal effect in raising unemployment means the engine analogy is not valid. There is no causal relationship between engine temperature and speed.
I think you’re falling for the no true Scotsman fallacy. We started this conversation talking about whether or not the Fed’s goal is higher unemployment. I presented an argument, in the Fed’s own words, that they plan on lowering inflation by weakening the labor pool. And your response is “that’s not really a goal.” I disagree and, and I don’t see a productive way forward for this conversation. At the very least, you should accept that this is a valid interpretation of the Fed’s own words, and not just some conspiracy theory being peddled.
Exactly. The quotes say that the Fed's goal is to control inflation, and that reduced demand for labor is going to be collateral damage. But reducing demand for labor is not the goal; controlling inflation is. The quotes do not say what im-a-baby claims they say.
> We’re never going to say that there are too many people working
I’ll admit that was a poorly-worded statement. But it still doesn’t convey the Fed targeting a higher unemployment rate. It isn’t. It’s targeting lower price growth, and keeping an eye on the labor market to avoid overtightening.
> Powell will continue to raise rates until the labor market cools.
This is entirely different from "complaining that the labor market is too tight." The Fed has nothing against a tight labor market so long as we don't have high inflation. Imagine you're a doctor and you're telling your patient that you're going to administer chemotherapy to a child until either the cancer goes away or they get too sick. Then you see protestors trying to convince laymen that you're complaining that a child is experiencing too much cell growth. That's exactly what GP is doing.
This seems unnecessarily pedantic. Powell has said he believes the tight labor market is driving inflation. It's a totally fair characterization to say "Powell believes the labor market is too tight" given his statements. In this case, "too tight" means "tight to the point of causing inflation"
"Excuse me, sir. The council is worried about the economy heating up. They wondered if it'd be possible to fire 500000. Maybe from one of the smaller companies where no one would notice..."
I don't see how what you posted contradicts what I said. I guess it all depends on how you interpret what Powell says, but him saying the labour market is overheated is a signal to the market that unless the labour market stops overheating the Fed pivot is not becoming more likely(which is all that market participants care about as of today with regards to the Fed meeting, i.e when is the pivot coming).
> him saying the labour market is overheated is a signal to the market that unless the labour market stops overheating the Fed pivot is not becoming more likely
The labor market isn’t being targeted. We have had tight labor markets with low inflation before. The Fed doesn’t spike them for the sake of it.
What’s targeted for reduction is inflation. Labor market tightness permits the Fed to respond to it, which is why it’s constantly talked about. If you are on a road trip and decide you can take a detour because you have ample gas, it wouldn’t be correct to say you took the detour to burn gas.
