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Something I read in the news today has me super confused, so could someone with a background in economics kindly explain this in layperson's plain English?
The first paragraph says, "The sizzling-hot July jobs report could force the Federal Reserve to continue raising interest rates at the fastest pace since 1994 as it tries to crush inflation and cool the labor market."
The article then goes on to explain that U.S. employers added 528,000 jobs in July, wage growth also accelerated and surged by 0.5% in the one-month period from June, and wages were up 5.2% compared to this time last year.
I don't understand why we would want to "cool the labor market." Isn't low unemployment good for the economy and the middle class? Aren't higher wages good for the economy and the middle class?
Economics is not my strong suit, so if anyone could explain this so someone without a Ph.D. in economics can understand it, that would be great. Thank you!
For the economy, good news but not a positive from a market or Fed perspective. They're trying to slow the labor market to slow inflation.
Best get to hiking them interest rates, boys.
For the economy, good news but not a positive from a market or Fed perspective. They're trying to slow the labor market to slow inflation.
Best get to hiking them interest rates, boys.
The Fed is NOT trying to slow labor. A lack of labor is what is causing this. The inflation we're battling now is not being caused by skyrocketing demand, it's being caused by a broken supply chain and supply not keeping up with what has been a return to normal, pre-pandemic demand levels.
I was just watching CNBC and they had a segment with Kevin O'Leary and he talked about not being able to hire anyone offering $22 per hour in CA, in a state where the minimum wage is $15. This was followed by snippets of interviews with CEO's, among the Addidas, Boeing, and a couple of others talking about how the biggest issue they're facing is the inability to hire people. On a more anecdotal level, I personally spoke on the phone today with a supplier who was several days late shipping an order for product they had in stock, but they're shipping department is a week behind in getting orders out the door because they're at 30% staff. Think about that for a minute!
The Fed's only tool to combat inflation is interest rate hikes, which does dampen demand, but what we really need here to reverse inflation is for the supply chain to catch up, and 528,000 new jobs created in July is a darn good start.
Just my humble opinion, but if the Fed doesn't break the economy by going too far too fast with interest rates hikes, and the economy keeps creating jobs like July, we could be in for a really strong 2023 and 2024. The roaring '20s if you will. My best guess is that we get one more 75 bp hike, than the Fed goes into a wait and see mode and slows down to 50/25bp after that, especially if the Aug 10 inflation numbers trend lower, as I believe they will given that everything from gasoline, energy and most commodities have been coming way down for a while now.
Last edited by treasurekidd; 08-05-2022 at 05:48 PM..
Something I read in the news today has me super confused, so could someone with a background in economics kindly explain this in layperson's plain English?
The first paragraph says, "The sizzling-hot July jobs report could force the Federal Reserve to continue raising interest rates at the fastest pace since 1994 as it tries to crush inflation and cool the labor market."
The article then goes on to explain that U.S. employers added 528,000 jobs in July, wage growth also accelerated and surged by 0.5% in the one-month period from June, and wages were up 5.2% compared to this time last year.
I don't understand why we would want to "cool the labor market." Isn't low unemployment good for the economy and the middle class? Aren't higher wages good for the economy and the middle class?
Economics is not my strong suit, so if anyone could explain this so someone without a Ph.D. in economics can understand it, that would be great. Thank you!
Vastly simplified.........more jobs = more money in the system. More money in the system = more money chasing the same set of goods and services which usually drives inflation.
Vastly simplified.........more jobs = more money in the system. More money in the system = more money chasing the same set of goods and services which usually drives inflation.
Also, more jobs created = more productivity = more goods and services created = supply catching up to demand = lower inflationary pressures.
The Fed is NOT trying to slow labor. A lack of labor is what is causing this. The inflation we're battling now is not being caused by skyrocketing demand, it's being caused by a broken supply chain and supply not keeping up with what has been a return to normal, pre-pandemic demand levels.
I was just watching CNBC and they had a segment with Kevin O'Leary and he talked about not being able to hire anyone offering $22 per hour in CA, in a state where the minimum wage is $15. This was followed by snippets of interviews with CEO's, among the Addidas, Boeing, and a couple of others talking about how the biggest issue they're facing is the inability to hire people. On a more anecdotal level, I personally spoke on the phone today with a supplier who was several days late shipping an order for product they had in stock, but they're shipping department is a week behind in getting orders out the door because they're at 30% staff. Think about that for a minute!
The Fed's only tool to combat inflation is interest rate hikes, which does dampen demand, but what we really need here to reverse inflation is for the supply chain to catch up, and 528,000 new jobs created in July is a darn good start.
Just my humble opinion, but if the Fed doesn't break the economy by going too far too fast with interest rates hikes, and the economy keeps creating jobs like July, we could be in for a really strong 2023 and 2024. The roaring '20s if you will. My best guess is that we get one more 75 bp hike, than the Fed goes into a wait and see mode and slows down to 50/25bp after that, especially if the Aug 10 inflation numbers trend lower, as I believe they will given that everything from gasoline, energy and most commodities have been coming way down for a while now.
That's solid analysis that I generally agree with. It's looking more and more likely The Fed. may guide us to a fairly soft landing.
Quibbles:
1. The Fed. has several tools to combat inflation by tamping demand.
A. Increasing bank reserve requirements, r (required reserve ratio). Increasing r jacks up bank lending rates instantly - and decreases lending volume. The net, net, net of increases in r and discount rate increases overlap greatly but are not identical.
B. Open Market Operations............usually money supply changes. More money in the system = more loans etc. and the reverse. The Fed. buys and or sells bonds (can be other instruments as well).....increasing or decreasing money supply and impacting bond prices directly. Term Action Facilities and Term Securities Lending Facilities are further examples.
C. NY Fed. overnight funds market management mainly via increasing or decreasing liquidity, fees and/or rates per the overnight market.
ETA - the NY Fed. increased the overnight funds rate (OBFR) last week.
Also, more jobs created = more productivity = more goods and services created = supply catching up to demand = lower inflationary pressures.
Sometimes when supply is the key driver and let's hope this time. That said it's not clear to me how much of this is supply and how much is A. govt injections of money/net effects of rent abatements/shipping hub snarls etc., B. structural changes in the labor market.......LFPR isn't going to improve much between the opt outs, oldsters and an educationally/skills bifurcated labor force leading many on the bottom to give up for life. C. Technology shifts.
IMO there may be just enough supply side improvement (it's happening in wood right now, maybe chips too a bit and oil has been falling as well)......allowing the Fed to use a softer hand.
Counter point........if supply does not improve enough, fast enough, The Fed. will drive us into recession forcing a reset also allowing supply and demand to recenter relative to reach other.
as I believe they will given that everything from gasoline, energy and most commodities have been coming way down for a while now.
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Speculators and traders like hedgefunds have recently unwind their positions and took profits,in reality physical supplies of gas,energy and some commodities are still tight.
OPEC said it will raise output by 100,000 barrels a day Whoopee,!
Natural gas in UK and EU will be rationed this winter.
Our Freeport McMonan problem would be solved this fall and we will continue t o export LNG to EU and SE Asia,with winter approaching,natural gas price will heat up again,not that it is low now.
Grain shipment from Ukraine and Russia have resumed,but it wont be like pre war,and the Taiwan issue could cause more problems with imports from China.
Few people pay attention to Mexico,we have a problem with the energy grid issue in Mexico and if it is not resolved,under the new treaty,we could impose sanctions on Mexican imports,where would we replace our avocados,papaya,peppers ?
For the economy, good news but not a positive from a market or Fed perspective. They're trying to slow the labor market to slow inflation.
Best get to hiking them interest rates, boys.
Except the problem is supply driven so driving down demand will just cause a recession (which is already has).
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