Jerome Powell cannot count on a labor market miracle


Federal Reserve Chair Jerome Powell’s dream of miraculous and painless disinflation in the labor market just experienced a surprise setback. Powell wants job vacancies to fall to cool wage pressures, but a Labor Department report Tuesday showed it was starting to move in the wrong direction. Powell shouldn’t be betting the house on his scenario, and chances are he’ll stop promoting it so enthusiastically.

Consider the recent developments that helped push two-year government bond yields to a 14-year high and exacerbated stock market declines.(1) Opens rose to 11.2 million in July from 11 million in June , the first increase in four months. Below the surface, the sources of the rise — government and low-paying service jobs — weren’t exactly indicative of boom times, but the numbers didn’t coincide with a slowdown in the hottest inflation in 40 years either. Coupled with the June job vacancy revision, the trend looks to be flattening rather than falling and there are still about two jobs for every unemployed person.

The data marks the latest chapter in a macro dogfight between Fed economists and outside researchers led by Olivier Blanchard, Alex Domash and Lawrence Summers, who have argued that Powell’s jobs miracle was too hopeless. Beneath their public back-and-forth on the math, there is a follow-up question about the livelihoods of millions of Americans: Are layoffs a necessary compromise in the fight against inflation?

Economists often assume that this is the case and that wage pressures come from too low an unemployment rate. But this time, the US started with an unprecedented number of job openings, and Powell has suggested easing wage pressures by simply lowering them. Everyone should obviously support this scenario, but there is clearly a risk that policymakers will exaggerate its likelihood.

The vacancies data surprised a market, which came in with a consensus forecast from economists that vacancies would fall below 10.4 million, but perhaps it shouldn’t have been so shocking. First of all, the Conference Board’s Help Wanted OnLine index comes out earlier and usually follows Department of Labor jobs fairly closely. In addition, markets were already getting a taste of just how tight the labor market was with the stronger-than-expected rise in non-farm payrolls in July. The number of layoffs, another measure of the tightness of the labor market, fell slightly to 4.2 million. The reaction to this only underscores the market’s sensitivity to anything with a tinge of inflationary pressures.

At this stage, the Fed needs to be honest with Americans about the cost of monetary policy. Powell began doing this in his Friday speech in Jackson Hole, Wyoming, where he stressed that higher interest rates “will cause some pain for households and businesses.” He should continue to do so, making it clear that the ideal case is not his base case so Americans can prepare for challenging times. Personal savings now make up just 5% of disposable income, the lowest since 2009, and credit card balances are soaring, suggesting most Americans are not preparing enough for the challenges ahead.

It’s also important to recognize the likelihood of economic troubles, as the Fed has some responsibility for them. While inflation is now a global phenomenon, the Fed downplayed it in 2021 and started its inflation fight so late that it now has to conduct an extremely dangerous late-cycle tightening that could be more torturous than it otherwise would have been.

Ultimately, Tuesday’s jobs report is just a month of data, with many caveats built in. The main data release of the week comes on Friday, when the Labor Department will update nonfarm payrolls and average hourly earnings. Meanwhile, job offers are a reminder that miraculous disinflation in the job market would never come easy, and Powell would do well to be level with the American people on this.

(1) RIDGES weren’t the only thing on retailers’ radars. The Conference Board Consumer Confidence Index, released concurrently with JOLTS, rose more than forecast in August, a net negative in the market where good news is bad news for the Fed.

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the US, covering finance, markets and M&A. Most recently, he was the company’s Miami office manager. He is a CFA charterholder.

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