That Other Mandate

January 10, 2023

We’ve spent roughly a year laser-focused on inflation. When will it peak? When will it get to levels low enough to make the Fed comfortable?

The Fed has a broad dual mandate of stable prices and full employment. The inflation news is the basic focus of the first part of that mandate, and employment is the second part.

With all the focus on inflation, what about employment? It’s been strong. Annoyingly strong, really. Don’t take my word for it, though:

What he said then, and what he reiterated in the December 2022 FOMC meeting, is that the labor market is keeping inflation high. He believes, and history shows, that persistent wage inflation keeps inflation high. If people are getting current wage hikes of 4.6%, we should expect inflation to generally follow suit.

Thus, that other mandate, full employment, is telling Powell to stay on a tightening course. I think he’s been very clear about concerns of “prematurely loosening policy” and that they will “stay the course until the job is done.” It seems clear to me the market is continually searching for the fabled pivot, but Powell keeps telling us it’s not coming soon.

In fact, at the December FOMC meeting, he shifted to a focus on the labor market. As long as the labor market is strong, at least in Powell’s mind, inflation is lurking and ready to strike. The market may want to get back to a 2020-like party mode, but Powell has told us that the labor market is “out of balance” and there will be no party until that has cooled. Fighting the Fed is a broadly bad idea, both up and down.

A lot can happen in six months, and ideally, it doesn’t pay to react to an event until a day before the market decides it’s important. That day may be unknowable, but we can look at investor positioning right now to see they’re totally unconcerned about a major recession. We need to see that while there’s a vague fear of future troubles, it’s neither in the data nor is it seen with investor positioning. Therefore, it’s just a phantasm. We have other, more pressing worries to deal with, right now, and won’t deal with other potential problems until we can actually see them.

There’s only so much bandwidth we have and using it to pay attention to far-off potentialities just isn’t a good use of our time and energy.