💡 Are Jobs Disappearing?

Issue 130

✌️ Welcome to the latest issue of The Informationist, the newsletter that makes you smarter in just a few minutes each week.

🙌 The Informationist takes one current event or complicated concept and simplifies it for you in bullet points and easy to understand text.

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👉 And you can always check out the archives to read more of The Informationist.

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Today’s Bullets:

• What Dual Mandate?

• Inflation Situation

• Jobs Disappearing?

• What Will the Fed Do?

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Inspirational Tweet:

This last week was packed with news and developments, both financial and political. And one of the highlights came out of the Federal Reserve’s annual Economic Policy Symposium in Jackson Hole, Wyoming.

This year’s theme was "Reassessing the Effectiveness and Transmission of Monetary Policy.” 🙄

Effectiveness being the operative word here, though I would probably replace the word Transmission with ‘Manipulation’.

I digress.

In any case, a key statement from Fed Chairman Jerome Powell’s comments out of Jackson Hole has had an impact on the markets.

He uttered the words: “The time has come for policy to adjust.”

Wait, wait, wait.

Does that mean ‘pivot’? Time to cut rates?

But inflation is not 2% yet, what could Powell be talking about, and how can they be ready to cut rates already?

And what does that mean for my assets, my investments?

All good questions and ones we will answer here today, nice and easy as always.

So, grab your favorite cup of coffee and settle into a nice comfortable seat for a little Fed talk in this Sunday’s Informationist.

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⚖️ What Dual Mandate?

Let’s face it, the Fed has been so clearly focused on inflation that it’s hard to remember that this is not their only mandate.

They in fact have what is called a Dual Mandate.

That dual mandate is price stability and maximum employment.

But what exactly does it mean?

In the Fed’s own words, Price Stability means that inflation remains low and stable over the longer run. Because…the economy can run efficiently when inflation is low and stable. But how low is low? The Fed seeks to achieve inflation that averages 2 percent over time.

So, a target of 2% inflation.

You may be asking, why 2%, where did that even come from and why not 1% or 5%?

Good question, and one that the Fed itself has a hard time answering.

For instance, on 60 minutes earlier this year, Scott Pelley asked:

Inflation has fallen from just over 9% to about 3%, near the Fed’s ultimate goal of 2%. Why is your target rate 2%?

Powell gave something of a word salad answer:

Interest rates always include an estimate of future inflation. If that estimate is 2%, that means you’ll have 2% more that you can cut in interest rates. The central bank will have more ammunition, more power to fight a downturn if rates are a little bit higher.

It seems he avoided the actual question by answering a different one, perhaps pretending to misunderstand the question as ‘why is your interest rate target 2%’, rather than ‘why is your inflation target 2%’.

In any case, no Fed official has ever been able to articulate the reasoning beyond ‘it’s the way it’s always been done’.

Truth is, it’s not the way it’s always been done, and the origins of the 2% target can be traced back to New Zealand in the 1980s, when their central bank formally adopted a 2% target ‘in order to establish a clear and stable pricing environment’.

For their relentless manipulation, of course.

No surprise, central banks around the world soon followed suit, also adopting this magical 2% target inflation rate.

Why?

In reality, the actual answer is more like: it’s the amount they can get away in order to debase the underlying currency, much like a hidden tax, without upsetting people to the point of rebellion.

Which brings us to the second mandate of maximum employment.

Manipulating the economy so severely that you cause mass firings and unemployment could lead to civil unrest.

Can’t have that either.

And so, the Fed uses its tools of interest rate target adjustments and the printing of and burning of money, otherwise known as QE and QT.

Injecting liquidity into markets and removing it.

They use these tools to try to manage the economy so that prices don’t rise or fall too dramatically and to not disrupt the labor market.

There is no actual target employment rate, BTW.

OK, so how is the Fed doing at its job, and why is it ready to suddenly start cutting rates?

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🧐 Inflation Situation

Without getting too much in the weeds here, we must acknowledge that the Fed has had a difficult job this past couple of years.

Of course, they brought it on themselves by printing trillions and trillions of dollars and flooding the markets with liquidity. The undeniable chief cause of inflation being expansion of the money supply.

Even so, they raised rates at a breakneck pace to battle this inflation and have been quite successful in bringing it back down from the towering heights of 9%+.

And then all their progress recently seemed to just stop in its tracks.

As you can see here, the CPI annual rate has been hovering around the 3 to 3.5% range since last year.

The chief cause of this, in my opinion, has been two-fold.

First, massive deficit spending coming out of the government has been a tailwind for certain parts of the economy and a headwind for the Fed, lessening the effects of rate hikes.

Also, remember that we came out of a long period of low interest rates…

That’s about 13 years of rates below 2.5% and the majority of them near ZIRP (Zero Interest Rate Policy).

What this means is that a large number of companies and consumers locked in long-term loans and lines of credit at extremely low rates. And unless a loan was maturing or expiring, there was absolutely no reason to refinance this past two years.

And they obviously have not.

And so, the effectiveness of a higher Fed Funds Rate has been muted by this.

It bears to note that the Fed’s ‘preferred’ measure of inflation is not regular ol’ CPI, but rather the Core Personal Consumption Expenditures Price Index or the Core PCE.

This is a measure of inflation that removes the highly volatile inputs of food and energy.

I mean, who needs those anyway, right? 🙄

In any case, we can see here that the Fed has also made quite a bit of progress toward a 2% level.

But, it is still nowhere near the long-term (before Covid Lockdowns) average of 1.6%.

Interesting that they are all ready to concede, as it seems the job is not quite done yet.

So what gives?

Inflation is still above 2%, why has the Fed suddenly announced that it is time to adjust policy?

Since we have not had a negative credit event or market shock, it can only mean that the Fed is concerned with the other side of that balancing scale.

A peek into Powell’s mind may look something like this:

But is it true?

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🤨 Jobs Disappearing?