1.5 Million Jobs – A Must Read – Weekly Market & Economic Update

This is a big one – in addition to my normal Market & Economic Update below I also want to give some deeper insight to interest rate hikes and their impact on you, and the economy. Grab a chair, and a glass of wine.

Interested in learning more? Schedule a call with me HERE.

Warmly,

Mark S Sauer

info@AllOneWealth.com
+1(310)355-8286

The big question(s) on everyone’s mind: Are interest rate hikes working? And how will this affect me long-term?

Last week, the Fed announced an additional rate hike of 75 basis points (0.75%) pushing us into a target range of 3-3.25% for the Fed Funds Rate. However, perhaps more importantly, Powell (Fed Chair) promised more future hikes – confirming the Fed’s hawkish sentiment. The central bankers’ predictions of how much they’ll raise rates now peaks at 4.6% – in 2023 – compared to 3.8% projections just two months ago.

Rates have refused to fall relative to what the Fed has hoped for. Headline inflation has fallen thanks to drops in oil and gasoline prices, however core inflation — the measure the Fed pays the most attention to — remained somewhere between 6% and 7%, whether measured month-over-month or year-over-year.

With Oil and gas prices having fallen – reducing one major cost for businesses – we should expect an eventual lowering of consumer prices. Additionally, surveys of inflation expectations show inflation going back to the “normal range” in 3 years: 

So if this projection falls into alignment with where we would like to see inflation, why keep hiking rates? Because it’s not a certainty. Because economics is not always 1+1=2. And ego: the Fed wants to be seen as one with inflation fighting credibility. One that understands the greater problem and can fix it with the – very limited – tools they have at their disposal.

So when will rake hikes end? When we enter a disinflationary environment. Not ‘deflationary’, ‘disinflationary’. However, my fear, is that the economy is like the Titanic – it doesn’t turn on a dime – and these aggressive rate hikes won’t simply result in the short-term changes the Fed hopes it will engender. Instead, we’ll see the above chart go from ‘where we want to be’ to far, far below it. Giving us deflation, not the desire disinflation. But like I said, 1+1 in economics doesn’t always result in 2. And fighting the Fed will only result in us becoming even more frustrated.

So how much will interest rate hikes hurt the economy? Again, this won’t happen overnight. But we are already beginning to feel the effects of skyrocketing rates, and the long-term effects will be felt – especially for the lower to middle income worker. Eventually, higher rates will curb economic activity, and then folks will begin losing their jobs. The Fed is prepared for this – in fact, this is their intention – and you should be prepared for this too.

We’re told that labor markets are really tight – we have labor shortages – so therefore we should see employment top out and real wages go up. But we’re not, real wages are failing to keep pace with inflation. And, in a typical sense, inflation is defined as real wages going up faster than the cost of goods and services – we have the opposite problem. Despite this, that’s not quite how Powell and the Fed see what’s going on. In his recent remarks, Powell said that the labor market is tight and that wages will need to come down in order to get inflation under control. In a world where wage growth has lagged so bad that most millennials can hardly afford to pay rent, let alone buy a home, it’s hard to believe that WAGES of all things need to come down MORE in order to curb inflation. But this is what the Fed wants to see – and this is what monster rate hikes can influence.

So the question we need to ask: how many Americans will have to lose their jobs for inflation to come back down to the ‘normal’ 2%. In economics there’s a term which represents this ideal percentage of humans beings: the “sacrifice ratio”. Usually the sacrifice ratio is expressed as the amount of economic output (GDP growth) that we have to give up in order to reduce inflation.

Macroeconomic models are notoriously full of unreliable assumptions. Assumptions which cannot be quantified and therefore we end up with correlations that aren’t directly tied to any causation – just the perception of its arbiter. In this case, the Fed.. And so, the sacrifice ratio is something we can easy point to, but can extremely hard to determine. Fed economist J. Benson Durham pointed this out in his 2001 paper.

In the 90s, Lawrence Ball looked at disinflations in OECD countries and found that the faster inflation came down, the less unemployment went up. With this in mind, wouldn’t it make more sense to get over the pain threshold quickly and smash inflation now? But Mazumder (2014) argued that when you look at core inflation rather than headline, this conclusion goes away – and as we know, the Fed has found core inflation to be their leading indicator.

What is actually causing current inflation still has us scratching our heads. Yes, we printed trillions in ’20 and ’21 for relief from Covid19 lockdowns. Then forgave any loans for those who accepted generous government checks. But much of the economic capital given out has since been eaten up by loss of economic value in the stock market as of late… Certainly, there seemed to be a spike in both inflation and inflation expectations when the Ukraine War and the Russia sanctions hit. But this hyper inflationary environment started much earlier than that. Falling oil prices and the end of supply chain issues haven’t brought down core inflation either. So the questions still remains, how much supply shocks played a role in our current environment? Again, 1+1 doesn’t always equal 2 in economics. Too many assumptions, and duration of any given change is always an issue – we’re on the Titanic, remember?

So let’s cut to the chase. How many Americans have to lose their jobs for the Fed to be happy? At what point will their ‘sacrifice ratio’ be met?

The Fed, is forecasting that headline unemployment will rise to 4.4% (from a current 3.7%) as a result of planned rate hikes. And this should satisfy our needs to curb inflation. Don’t ask them where this number came from – they won’t tell you what their internal model looks like because it’s likely accompanied by a flurry of macroeconomic assumptions…

Regardless, this would mean about 1.5 million Americans would be out of work. One-sixth of the number of Americans who lost their jobs in the Great Recession.

That sounds horrible. And it is. Heartless even. Our goal as Americans is to ‘live the American dream’. And when those in economic power literally working to influence policy so you could potentially lose your job, it certainly seems like policy makers are quite un-American right now. However, the tradeoff being that we condemn hundreds of millions of Americans to watch their living standards steadily fall – continuing the path we’ve been on for the last two years. Grim tradeoffs are the name of policy making. And for that I do not envy the Fed in this moment.

I’ve said it before and I’ll say it again. Do not fight the Fed. It’s a losing battle. Educate yourself and plan accordingly. At this point, one must also hope that the Fed is simply being pessimistic – and all of their concern’s will be an iceberg we swiftly elude. Let us hope.

Below is your weekly Market & Economic Update by the numbers.