That Other Mandate

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.