|
|
As inflation reared early this year, the U.S. Federal Reserve bet that the labor market could run strong without pushing costs and prices higher for a prolonged period—a bet that has proven to be wrong, Wall Street Journal columnist Greg Yp wrote in a 17 December analysis.
The Fed continued to insist that inflation would be “temporary,” then “transitory,” while the central bank kept pouring money into the economy to support business and, particularly, hiring.
Through much of this year, the Fed said its primary goal was to see “full employment,” which later was adjusted to “maximum employment,” before it would rein back stimulus spending or raise interest rates, as we noted in “Will Fed Reduce Bond Purchases Later this Year?” (3 Aug 2021).
Late last month, Fed chair Jerome Powell admitted in Congressional testimony that inflation has turned out to be neither temporary nor transitory and has now forced the Fed to shift its focus from force-feeding the job market to lassoing relentless price increases (“The Powell Push: For Better or Worse,” 7 Dec 2021).
Unemployment dipped to 4.2 percent in November and wages are rising briskly, Yp noted, but 4.9 million fewer Americans are working now than in February 2020, leaving the Fed far from its goal of full employment.
Also, wages are not inflation’s primary driver; consumers’ unstinting demand for houses, cars, and other big-ticket items are leading prices higher, Yp said.
However, growing pressure for pay hikes during an inflationary period likely will determine inflation’s future, he said.
Wages rose at a 6-percent annual rate during the third quarter, according to Fed figures, which would be sustainable if worker productivity was growing at 4 percent annually, twice its historical rate, Yp noted.
Instead, productivity actually declined this year through September, government figures show.
The loss of productivity is due, in part, to the way the U.S. handled workers cut off by the COVID shutdown compared to Europe’s approach, Yp argued.
“When COVID-19 hit, the U.S. chose to support workers largely by letting companies fire them and then pay generous unemployment insurance to keep incomes stable,” MIT economist Kristin Forbes said.
As a result, “people lost connection with their jobs and dropped out.”
“In Europe, they chose furloughing people and they were still connected and had a job to come back to,” she pointed out.
Through its choice, the U.S. may have raised the “natural” unemployment rate that is consistent with low, stable inflation, Forbes argued.
All of which leaves the Fed to guess again: it can keep interest rates low because supply-line issues will work themselves out, Yp agrees, but that could take a year or more. Meanwhile, prices and wages could chase each other higher in a wage-price spiral that could take on a life of its own.
The Fed has no choice but to tighten policy now to slow inflation, but at the risk of also slowing the economic recovery now while raising the risk of a recession later, Yp concluded.
TREND FORECAST: We note this article to illustrate the Fed’s failures and how, for nearly a year, they were either too stupid to forecast inflation’s rise, or were lying so they could keep pumping in cheap money to artificially boost equities and the economy.
And while not rising as fast as inflation, salaries will continue to rise as the demand for workers is greater than the supply. Also, one of our Top Trends for 2022, “Unionization,” will also push wages higher.