Your full-time job is now Jay Powell's full-time job
Keeping the labor market from softening any further is the top US central banker’s top concern.
Two Federal Reserve officials laid out wildly competing visions for the US job market in the mountains of Wyoming over the past two days.
And we should probably be glad that the more pro-labor view is coming from the person who’s ultimately in charge.
On Thursday, Philadelphia Fed chief Patrick Harker advocated for a “slow, methodical approach” to lowering interest rates and suggested that the unemployment rate would likely rise to close to 5%.
The cycle low for the unemployment rate is 3.4%; near 5% would mean a 1.5 percentage point increase in joblessness. Based on data going back to the late 1940s, every time the unemployment rate has gone up that much, the economy had either entered a recession or was about to do so.
Neil Dutta, head of US economics at Renaissance Macro Research, flagged that based on a popular model that sketches out a relationship between joblessness and growth, reaching a 5% unemployment rate in a year’s time would imply that the economy contracted slightly.
Harker is the bear case for the labor market, the economy, and by extension, the stock market, too. More joblessness equals less spending, which means lower corporate profits.
Fed Chair Jay Powell provided a stark contrast in his address at the Jackson Hole Economic Symposium on Friday morning.
While Harker seems to think that maintaining current labor market conditions isn’t a top priority, Powell’s speech included many forceful arguments that the central bank should want the labor market to be at least this good, if not better.
Some key quotes:
“...labor market conditions are now less tight than just before the pandemic in 2019—a year when inflation ran below 2 percent.”
Translation: We’ve had a better job market than this at a time when we weren’t worried about inflation, so we have room for labor market conditions to improve from here without fearing a long-lived resurgence in price pressures.
“We do not seek or welcome further cooling in labor market conditions.”
Translation: Well, I’m certainly not saying the unemployment rate should go to 5%!
“We will do everything we can to support a strong labor market as we make further progress toward price stability.”
Translation: a rising unemployment rate is currently more of a worry than inflation that is still a little higher than the central bank would prefer.
If Harker is the bear case, then Jay Powell is the bull case. And since he’s the one with the most influence among monetary decision-makers, investors are treating his bull case like it’s their base case – at least for today.
