During last week’s Federal Open Market Committee (FOMC) press conference, Federal Reserve (Fed) Chair Jerome Powell tried his best to deflect responsibility for the recent inflation surge. His list of culprits included the pandemic-driven supply chain disruptions, higher commodity prices (made more extreme by the Russian invasion of Ukraine), low labor force participation and consumer demand failing to shift quickly enough from goods to services. Noticeably absent from his list was the Fed’s prolonged easy money policies fueling demand-driven imbalances across a broad range of goods and services — including within the labor market, where higher wages can lead to self-reinforcing, more persistent price pressures.
A key takeaway from the press conference was the significant pivot in Chair Powell’s views on labor market conditions, which partly explains the Fed’s hesitancy to raise interest rates until now. As recently as the September FOMC meeting, several Fed participants judged “the economy was still well below maximum employment,” with substantial further progress still required. Policymakers were more focused on the lagging labor force participation and millions of jobs lost since the onset of the pandemic than the ongoing supply-and-demand imbalances in the labor market.
Even though employers have been struggling to find workers for more than a year, Fed Chair Powell is just now acknowledging labor markets may be overheating: “If you take a look at today’s labor market, what you have is 1.7-plus job openings for every unemployed person. So that’s a very, very tight labor market, tight to an unhealthy level, I would say.” By his own admission, Powell previously erred in his assessment of how persistent inflation pressures would be. He now may face a similar dilemma with the prospect of tight labor market conditions even as U.S. economic growth begins to slow.
Powell again stuck to the script during his FOMC meeting press conference, repeatedly citing the need for the Fed to use its powerful tools to bring down inflation. If inflation pressures remain elevated moving forward, investors are unlikely to stay patient with a Fed that’s only willing to take baby steps to tighten policy.
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