Bloomberg has a couple of articles today where prominent economists respond to today’s strong jobs report. Here is Chicago Fed president Austin Goolsbee:
Federal Reserve Bank of Chicago President Austan Goolsbee lauded the strong September jobs report but warned of putting too much stock in one month’s data, adding that there are risks that inflation might undershoot the central bank’s 2% target.
“This jobs number today, and the whole report, is a superb report,” Goolsbee said Friday in an interview with Bloomberg Television’s Michael McKee.
And here is Larry Summers:
Former Treasury Secretary Larry Summers said the Federal Reserve’s decision to cut interest rates last month was a mistake after new data showed that US job growth last month topped all estimates.
“With the benefit of hindsight, the 50 basis point cut in September was a mistake though not one of great consequence,” Summers, a paid contributor to Bloomberg TV, said in a post on X.
Nonfarm payrolls increased 254,000 in September, the most in six months. The unemployment rate fell to 4.1% and hourly earnings increased 4% from a year earlier, according to Bureau of Labor Statistics’ figures released Friday.
I’m with Summers. While it’s true that inflation might briefly undershoot the 2% target, that would likely be due (if it occurs) to positive supply shocks. The Fed should focus on demand-side inflation, and all the evidence I see points to continued strong growth in NGDP and nominal wages. It is not true that “the whole report, is a superb report.” Twelve month nominal wage growth accelerated to 4%, which is too high. We need further monetary restraint to get price inflation sustainably down to 2%.
I think Summers is correct that a smaller rate cut would have been better, and also that the mistake was probably not very consequential. If the Fed is making a serious mistake (and it’s too soon to reach that conclusion), it would likely be due more to excessively expansionary forward guidance than to setting a fed funds target 0.25% too low at a single meeting. For the moment, I’m willing to give them the benefit of the doubt, as most of the market-oriented forward indicators look pretty good. It’s clear, however, that the mini-panic about the labor market that occurred a couple months ago was premature. We were not teetering on the edge of recession.
In my view, both Fed hawks and Fed doves make the same mistake, responding asymmetrically to supply shocks depending on whether or not the implications support their policy preference. Thus doves tend to correctly discount inflation surges driven by reductions in aggregate supply, while ignoring the significance of inflation declines driven by increases in aggregate supply. Hawks make the opposite mistake. Recently, the aggregate supply situation has been quite good, resulting in a headline inflation rate that is lower than the core inflation rate (and also lower than predicted from NGDP growth, or nominal wage growth.) That’s not likely to last.
The only “flexible average inflation targeting” regime that works in the long run is stable NGDP growth, at roughly 4%. We aren’t there yet, but the Fed has made substantial progress since the very high inflation of 2022.
READER COMMENTS
Matthias
Oct 4 2024 at 7:43pm
What’s the evidence that they actually made progress instead of just gotten lucky?
Craig
Oct 5 2024 at 8:22am
“The index for owners’ equivalent rent rose 0.5 percent
over the month and the index for rent increased 0.4 percent.” (Last CPI report)Amd I am quoting that because the last M/M number was a .2 overall. My suspicion is OER dampened CPI stat on way up and is now doing reverse, mathematically pinning inflation up. I am a bit critical of this stat because they call homeowner and ask, “what do you think you could rent your gome for?”Of course it doesn’t reflect a price anybody actually paying. So if they called me I might report a higher OER number but the mortgage payment isn’t going anywhere.In any event I would also suggest checkibg out USA inflation number from Truflation which is currently 1.97%
Scott Sumner
Oct 5 2024 at 10:12am
I agree about OER, but the nominal wage growth confirms that inflation is still elevated.
Craig
Oct 5 2024 at 8:15am
I don’t really see the cut as a mistake because in my view the 10 year is under so the market itself cut rates. I feel that Summers’ comment reflects a continued implicit Phillips Curve reasoning, ie people work, they spend money and that’s inflationary. But employed people also contribute to the available pool of goods and services. If unemployed, they very well may collect unempllyment, spend that, which is less, but then contribute far less to the pool of goods and services.
Nevertheless at the present time, short/medium I still see disinflation baked in the cake, the money supply was decreasing for a decent amount of time and now is growing but more slowly.
Moonmac
Oct 5 2024 at 9:58am
Endless Fed Puts, Wealth Effects and Wall Street Bailouts are just perverted forms of Communism for the already rich.
Yuppies worship artificially increasing Asset Values instead of Jesus.
George
Oct 5 2024 at 3:22pm
I haven’t taken an economics course in 50 years. But if I remember correctly, under the Keynesian model, excess fiscal stimulus would cause inflation by increasing aggregate demand. A tax increase or a reduction in government spending would reduce inflation by reducing aggregate demand. In the Neo-Keynesian model, what role does government spending/taxation play? It seems like the Federal Reserve has to do all the heavy lifting. Is this because the federal government is politically incapable of adjusting spending or taxation?
mira
Oct 5 2024 at 4:01pm
I wonder if people are now going to call this rate cut political, with the full benefit of hindsight.
I worry actions like these so close to an election hurt Fed independence, especially when in my view the breakeven inflation expectations did not even remotely justify a half point cut.
Scott Sumner
Oct 5 2024 at 7:30pm
I doubt it was political. The markets expect many more cuts next year. Some argued for a cut in July. In any case, what would be the GOP argument? “The Fed chair appointed by Trump is doing a bad job?”
Bob
Oct 6 2024 at 1:11am
The modern GOP would be happy to rely on the fact that voters know nothing about fed chais. They want a massive recession when a Democrat is in power, and for overly expansionary policy when they are in power. Most of the economists that align with them know this is a nonsensical plan, but also understand that that public disagreement is bad. Kind of how Krugman will defend a Democratic administration ‘s plan whether it makes sense or not.
mira
Oct 6 2024 at 1:10pm
I fully agree it wasn’t political – just worried that it might be *construed* to be political and put the Fed in GOP crosshairs.
Not a particularly coherent one, I agree, but they’ve already been making it and this will only add fuel [0]. Powell being Trump’s nominee certainly doesn’t seem to be stopping Trump from criticizing, at least. I think I just have less confidence in the GOP rank-and-file’s distaste for incoherent argument.
[0]: https://www.reuters.com/world/us/trump-says-feds-rate-cut-was-political-move-2024-09-20/
Scott Sumner
Oct 6 2024 at 4:25pm
“Not a particularly coherent one, I agree, but they’ve already been making it”
It’s become impossible to engage in any sort of rational political debate in America. People just say whatever they wish, with no connection at all to the truth. Politics has always been dishonest, but now it’s just off the charts.
Craig
Oct 7 2024 at 5:36pm
It wasn’t too long ago when Powell was saying, “Higher for longer.” I see the Fed’s actions as inherently political in a broader sense because banks need lower rates to abate the unrealized losses sitting on their books and the government is staring mounting interest expense. It wasn’t too long ago when Powell was saying, “Higher for longer
bill
Oct 12 2024 at 9:19pm
At the time if the cut, 5 year breakevens were below 2% (CPI, so even lower for the target PCE) while the market expected a 50bps cut. Breakevens have since risen based on new CPI and unemployment data. It’s not reasonable to expect the Fed to predict the future. I wish they’d follow an NGDPLT but since they’re focused on inflation, they should be basing their adjustments on the current market based projections for inflation.
spencer
Oct 7 2024 at 11:44am
QT needs to be large enough to stop any increase in the money stock.
Unfortunately, “Since the crisis, the Fed has conducted monetary policy under an ample reserves framework, where it creates so many reserves that banks’ demand for reserves does not influence market interest rates.”
https://crsreports.congress.gov/product/pdf/IF/IF12147
But the money stock can never be properly managed by any attempt to control the cost of credit.
Thomas L Hutcheson
Oct 8 2024 at 10:59am
One should not shrug off the possibility of undershooting the target. That never helps relative prices adjust.
If 50 bp was too much it’s only because part of it should have come sooner.
“Forward guidance” of what future instrument setting will be is always a mistake.
Travis Allison
Oct 9 2024 at 3:11pm
Scott, regarding positive supply shocks, I believe in the past you have mentioned that the increase in labor supply due to illegal immigration has been a positive supply shock. I took you as also meaning that an increase in the labor supply reduced inflation. Wouldn’t an increase in labor supply only reduce inflation in the case where the Fed targets NGDP growth? Otherwise, if the labor supply increases 1%, GDP increases 1% and NGDP increases 1% also, so prices will be the same as before. To me, labor is different from a good such as oil, where an increase in the supply of oil will (ceteris paribus) cause a price drop in oil and the products that use oil. By contrast, a new supply of labor will by itself result in an increased demand for labor as the new labor demands goods and services. So the *real* price of labor doesn’t drop, after equilibrium is reached. What are your thoughts?
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