The Fed Gears Up To Crush a Limping Job Market
On Friday, the Bureau of Labor Statistics (BLS) released its monthly “Employment Situation” report. Was the (approximately) $350 billion* drop in the total value of America’s publicly traded equities that day a response to that report? No. It was a response to the market’s fears about how the Federal Reserve might react to the report.
Let’s look at the BLS report itself.
Full-time-equivalent (FTE)** jobs increased by 135,000. However, labor force participation extended its long slide, and wages remained stagnant. In other words, August was a “normal” month for jobs, within the context of President Obama’s slow-growth “new normal” economy.
The financial press is obsessed with the question of whether the Fed will raise its Fed Funds interest rate target at its September meeting. Various members of the FOMC*** have contributed to the public debate over this issue.
All of this talk about “raising interest rates” can only alarm the financial markets, because it bespeaks a frightening disconnection from reality on the part of the Fed. Here is what the markets know that the FOMC obviously does not:
1. The Fed does not need to “fight inflation” any more than the U.S Bureau of Standards needs to fight to keep the foot from contracting.
2. The Fed’s “Phillips Curve” intellectual framework is completely wrong. Rising employment and wages do not cause inflation.
3. The Fed should be focusing on the value of the dollar, not on interest rates.
4. The Fed’s goal should be a stable dollar, not 2% inflation.
5. Commodity prices (e.g., the CRB Index****) provide the only useful measure of the value of the dollar.
6. Within the Fed’s flawed Phillips Curve intellectual model, the reason to raise interest rates is to head off inflation. However, right now, we are actually in a dangerous deflation. Since June 2014, the price of gold, the CRB Index, and the 5-year Treasury-TIPS spread have fallen by 15.41%, 38.18%, and 42.50%, respectively.
In his speech to the Fed’s Jackson Hole conference on August 29, Federal Reserve Vice Chairman Stanley Fischer, expressed confidence that inflation will soon move up to the Fed’s 2% target. This was pure central planner arrogance. Last Thursday, the markets were saying that they expected 1.16% CPI inflation over the next 5 years. This was down from 1.22% the day before Fischer gave his speech.
So, right now, the Fed is completely obsessed with whether it should employ an irrelevant tool (the Fed Funds rate) to fight a non-existent problem (inflation). What could possibly go wrong?
Meanwhile, the chaos in the financial markets resulting from incompetent, undependable monetary control has real costs. The cost of capital will be higher. Capital investment will be lower. As a result, both employment and wages will be lower.
For Republican presidential candidates that are interested in running on economic growth, promising to end the craziness at the Fed would be a good place to start.
*Based upon the Wilshire 5000 Index
**FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
***Federal Open Market Committee, which is the body that determines the Federal Reserve’s monetary policy
****The CRB Index is a commodity price index comprising: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gasoline, and Wheat.
Originally posted on RealClearMarkets.com.