We are getting close to the point where the Federal Reserve will start the draw-down of its very expansionary monetary policy. It should start in November, probably right after the next meeting with the Federal Open Market Committee.
We are also getting close to the point where President Biden needs to make a decision on whether or not to reappoint Jerome Powell as the chairman of the Federal Reserve.
Pray to God that he does. At this point, America’s economic survival may very well hinge on his continuation at the helm of the central bank.
The left is putting pressure on the president – and his entire administration – not to reappoint Powell. They know that if Powell starts rolling back the current monetary expansion, the Democrats in Congress will not be able to roll out their absolutely reckless expansion of the welfare state. Putting ideology over the very economic survival of America, they want to convert the Federal Reserve from an independent central bank into a de facto extended arm of the U.S. Treasury.
It’s also known as MMT, Mad Monetary Theory.
The leftist pressure is not only coming from the far left in Congress, but is also mounting in mainstream media. Its most obvious form so far has been their abnormal outcry over the September jobs numbers. The Washington Post cries a river while MSN suggests:
The weak September jobs report offered the latest sign of the coronavirus pandemic’s hold on major sectors of the economy, conflicting with the type of recovery the Federal Reserve forecast back when the nation was entering its recent surge in cases.
And from NPR:
Employers added just 194,000 jobs in September, according to a monthly snapshot from the Labor Department. That’s even worse than the anemic job gains in August and far below the pace of hiring earlier in the summer, when employers were adding around a million jobs a month.
It is unheard of that mainstream media would complain over a jobs report with a Democrat in the White House and Democrats controlling Congress. But all of this, of course, is aimed at putting even more pressure on Jerome Powell to cave to the leftist demands for an MMT-style perpetuation of current money printing.
More on that in a moment. First, though, let’s get the facts clear about the labor market. I do not share the sentiment of disappointment that runs through mainstream media, but that is not to say there aren’t problems with our labor market. There are, and they show up clearly in Figure 1. The share of the U.S. population that is currently working could be a lot higher. That share exceeded 60 percent for two years under the Trump economy: starting in February 2018 at 60.1 percent, the share topped out at 61.2 percent in October 2019, but remained above 60 through February 2020:
After having bottomed out at 51.3 percent in April 2020, the height of the artificial economic shutdown, the employment gradually recovered and reached 58.7 percent in July this year. Since then it has been stuck around that level: 58.6 percent in August and 58.8 percent in September.
Compared to historic numbers, the ones for July, August and September are equal to the same months in 2012. In other words, looking at workforce participation, the recovery from last year’s economic shutdown has stalled. We have de facto been thrown seven years back in time.
This, of course, is not good, in part because it hints that we may be on the cusp of a longer period of stagnation. At the same time, there is a distinctly positive trend in the private-public employment balance: the jobs that are being created are predominantly located to the private sector. For the past four months, the private-sector share of total employment has been the highest or second highest in at least ten years. For example,
- In July, 81.9 percent of the employed workforce worked in the private sector; only July 2020 has a higher number at 82.2 percent;
- In August, the private share reached 82.2 percent, higher than even the 82 percent flat in August 2019;
- In September the share was 81.6 percent, again a record for at least the past ten years:
But what about the lamenting in the mainstream media? What about the suggestion that this latest month of employment growth was so disappointing? Looking at historic trends, specifically 2012-2019, the average monthly private-sector jobs growth during has been:
- 0.7 percent in May;
- 0.8 percent in June;
- 0.1 percent in July;
- 0.1 percent in August; and
- -0.4 percent in September.
Comparable 2021 numbers:
- 0.8 percent in May, i.e., +0.1 percentage points;
- 1.2 percent in June, +0.4;
- 0.7 percent in July; +0.6;
- 0.1 percent in August, equal to historic average; and
- -0.2 percent in September, +0.2.
With the exception of June, and possibly July, the jobs growth in recent months has largely followed pre-shutdown trends. Furthermore, the statistically noteworthy deviations we have seen are positive compared to trends. In other words, there is no real reason for mainstream media to lament.
But lament they do, and so does Yahoo Finance. At the same time, they do not beat about the bush, relating as they do the jobs numbers to the Federal Reserve’s plans to start rolling back its heavy monetary expansion. This, of course, gives away the true reason behind the pessimism across mainstream media: to put pressure on the Fed to continue printing money like drunken sailors.
To make their case even stronger, Yahoo Finance enrolled analysts from across the financial industry. It is not working very well. For example:
GARRETT MELSON, PORTFOLIO STRATEGIST AT NATIXIS INVESTMENT MANAGERS SOLUTIONS, BOSTON “It’s not so much that the Fed’s on autopilot. It’s that they’ve been very clear and consistent that it’s pretty much time to start the tapering process. They’ve been telling markets it’s on the horizon for months now.” “I really don’t think this changes the outlook for tapering. A weak print might change the pace but it doesn’t change the start date.”
All other things equal, I concur. If Federal Reserve Chairman Jerome Powell stands tall, he will begin winding down the monetary expansion within the next two months.
Kathy Lien, managing director of BK Asset Bank Management:
“I think that the Federal Reserve made it very clear that they don’t need a blockbuster jobs report to taper in November, so while you’re seeing a little bit of a pullback in the dollar, I think the Fed remains on track.”
Along the same line:
CARL TANNENBAUM, CHIEF ECONOMIST, NORTHERN TRUST, CHICAGO “My take: the Fed was hoping for a number large enough so that their decision to begin tapering last month would be an easy one. Now, the discussions on November 2-3 may be more difficult; and the market will have to deal with some additional uncertainty.”
Some analysts were more generally macroeconomically oriented in their comments. For example, Russell Price, Chief economist of Ameriprise Financial Services:
“This is a stronger report than on first appearance. Sectors other than education still performed pretty well. Manufacturing had a good month despite all the supply constraints it continues to suffer. In fact, the motor vehicle sector dropped 6,000 jobs due to temporary layoffs and construction added 22,000. Even retail gained a strong 56,000.”
Even though Price does not say so explicitly, his comment hints that the Federal Reserve would be correct to begin its monetary tapering as planned.
Along the same lines, Sameer Samana, senior global market strategist at Wells Fargo Investment Institute:
“Payrolls data came in weaker than expected, but the overall trend of an improving labor market remains intact.” “The internals also suggest some underlying strength with average weekly hours ticking up and wages staying firm.” “The continued healing should continue to underpin consumption and economic growth.”
Again, a comment suggesting that the Fed has the macroeconomic reasons it needs to start rolling back monetary expansionism. At the same time, it is worth noting that while jobs creation is not worse than historic trend, it could be much better. As Figured 1 shows, workforce participation, and therefore employment, is lower than it was before the 2020 shutdown. If workforce participation had been the same in September 2021 as it was in 2019, another 3,665,000 Americans would have been on the labor market; if all of them would have had a job, we would have had the highest employment number ever for the month of September, with the exception of 2019. But instead of 157,691,000 Americans working, we only had 154,026,000.
These numbers matter, because they suggest that we still have a long way to go before we have restored the economy from the major harm done by last year’s shutdown.
Another focused comment, this one from Kathy Jones, chief fixed income strategist with the Schwab Center for Financial Research. However, unlike the others she explicitly suggests that the monetary tightening might not happen yet for a few months:
“I would say it was a good enough report or a decent report to qualify for the Fed to start tapering.” “It really doesn’t change the trajectory of where (the Treasury market is) going. We’ve had a steeper yield curve, rising yields, expectation for the Fed to start tightening sometime in 2022 — all that seems to be intact. I’m not seeing a huge enough change in the Treasury market to signal that people have changed their views.”
The one word that has not been mentioned yet is put forward in the one comment that hits the nail on the head:
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK “This is a disappointing number and it’s being accompanied by higher wage costs and that’s pointing to higher wage inflation down the road. It’s not likely to derail the Fed’s tapering.”
Bingo. The Federal Reserve is more afraid of inflation than of its slow hike in interest rates causing a stagnation of jobs creation. As they should be. There is very little evidence that higher interest rates at this low level will have any discernible effect on private-sector economic activity. The Fed probably has at least two percentage points of leeway before it reaches the point where higher interest rates start taking a toll on business and household activity and spending.
Where we are now, inflation is much more of a concern as a weight around the ankle of the American economy. The Federal Reserve seems to agree, and I hope they hold on to their plans for monetary tightening. If they cave to the leftist pressure to continue to print crazy amounts of money, 2022 is going to be a bad, bad year for us all. Inflation will continue to rise and will easily shoot past ten percent, real-sector stagnation will continue and unemployment start rising again, and the federal government will rapidly approach that black hole known as a fiscal meltdown.
To be short and blunt: America’s economic survival hinges on the re-appointment of Jerome Powell as chairman of the Federal Reserve.