Disingenuous Fed

Sheriff J.W. Pepper: There’s the son of a b****. I got him.

[to Bond]

Sheriff J.W. Pepper: What are you? Some kinda doomsday machine, boy? Well, we got a cage strong enough to hold an animal like you here!

Felix Leiter: Captain, would you enlighten the Sheriff please?

State Trooper: Yessir. J.W., let me have a word with ya. J.W., now this fellow’s from London, England. He’s a Englishman workin’ in cooperation with our boys, a sorta secret agent.



Character actors usually don’t steal the show. In 1973, Live and Let Die did more than introduce diehard fans to Roger Moore as James Bond and Jane Seymour as Solitaire. Clifton James played the unforgettable, uncouth Louisiana Sheriff John Wayne (J.W.) Pepper. His indignation reminded us of another important player with the same first and last initials — J. P. — one Jerome Powell.

At the March FOMC presser, the Associated Press’ Federal Reserve reporter Chris Rugaber asked: “…what are the mechanisms you see in reducing demand? I mean, outside housing and autos, how do higher fed rates reduce consumer demand unless it’s through higher unemployment?” To this, Powell replied referencing 1.7-plus job openings for every unemployed person: That’s a very, very tight labor market, tight to an unhealthy level, I would say. So, in principle, if you were – if – let’s say that our tools work about as you described and the idea is we’re trying to better align demand and supply…if you were just moving down the number of job openings so that they were more like one to one, you would have less upward pressure on wages.”

While we appreciate employers’ plight, reduced job availability – which is what Powell effectively stated as a goal – contradicts what he wrote in December 2019 to conclude the introduction to the Government Performance and Results Act, Strategic Plan 2020–23: “At the Federal Reserve, we know that our decisions matter for American households and businesses. Our long-standing, nonpartisan tradition is to make decisions objectively, based only on the best available evidence, and in the best interests of the American people.”

Dare we point out that “less upward pressure on wages,” when inflation has whittled away at household purchasing power from lower income earners, is the opposite of that which is “in the best interests of the American people”? Whose side is Powell on?

Before jumping into analyzing the latest data on job openings, we should caveat that the closely watched Job Openings and Labor Turnover Survey (JOLTS) via the Bureau of Labor Statistics has only been around since 2000. In a recent forensic analysis of data that predate JOLTS, QI friend Philippa Dunne cited Fed research mined from Historical Statistics of the United States. The bottom line: “Quit waves in manufacturing in 1948, 1951, 1953, 1966, 1969, and 1973 were all in line with or exceed recent experience.” We hope that helps you contextualize the “record” (in a 22-year data series) high 3.0% of U.S. workers who quit their jobs in March.

The highest wage growth cohort of job hoppers notwithstanding, what about that other record – the 11.5 million job openings? Because there are always two ways to skin that proverbial cat, we recreated postwar history of our own by welding together the JOLTS numbers with that of the Conference Board’s Help Wanted Advertising Index (green line). As you see, there’s zero equivocation – the labor market is in rarefied air.

Critically, job openings and the unemployment rate have had a tight relationship over time. Annual trends in each metric (purple and yellow lines) sport a -0.86 correlation since the 1950s. Weakness or strength in one follows the other.

Inserting Powell’s “unhealthy” concerns on labor market tightness back into the equation, we generated a one factor model using the annual trend in the Fed funds rate to project that of job openings. Knowing monetary policy works with a lag, the best fits proved to be a Fed funds lag of five and six quarters. Using five different paths of the Fed funds rate from the Fed’s March Summary of Economic Projections, we generated five different routes for job openings which we subsequently input into another one factor model to project the unemployment rate. Best fits here included the current quarter and a one quarter lag for job openings. The inset table depicts the five Fed paths and the five resulting unemployment scenarios. The sensitivity analysis does not flag a materially higher unemployment rate until 2023. That said, none project a falling unemployment rate into next year.

We should add that the turn in the labor market could feel more abrupt when it arrives. Not only is JOLTS a woefully lagged series – we got March data on May 3rd – it’s inflated. In an early February Intelligence Briefing, we featured a graph Simplify Asset Management’s Michael Green cooked up (we’ll update it soon). The thrust was that since JOLTS’ inception, there’s been a steady inflation in the number of job openings vis-à-vis the series’ Hires Rate. The upshot: there are about a third more advertised openings than actual positions that need filling. Working contra to “the best interests of the American people” to get job openings down using the blunt tools of monetary policy will serve one purpose given the unemployment rate is the most lagging of economic indicators – it will deepen the recession.

Posted in Daily Feather.