What a healthy US labor market looks like

A James Alexander post

Tim Duy provides an excellent summary  of the state of play in the US economy from last week’s data releases. While Duy lands on the side of caution in terms of rate rises he is still unsure about what the Fed is actually targeting. I don’t think Duy is cautious enough because the Fed should drop all ideas of rate rises in the future, and not just talk about delaying them. A neutral stance rather than their current stop-start tightening bias is most appropriate.

One of his charts shows wage growth over the last 20 years. I think it shows just how far the US has yet to go in terms of achieving a healthy economy that needs any monetary tightening. Back in the 1990s hourly wage growth was running at around a nominal 4%. The Atlanta Fed wage growth showing wage growth for those in work for at least 12m was running at 5% – the difference being that those in temporary or part-time employment often see less wage growth.

JA Healthy Lab Market_1

Looking at just the Atlanta Fed data itself,  there is a fascinating breakdown between different categories of employed workers. Particularly job stayers vs job switchers. A healthy labor market, from the point of view of labor, is one where there is a good degree of job switching. It is also healthy from the point of view of the economy in that it allows good nominal growth to do its magic.

JA Healthy Lab Market_2

A healthy labor market, a healthy economy

  • One where workers who perform less well (are less productive) than average or in firms of industries doing less well than average, see their nominal pay rise but by less than those doing better (more productive) than average or in firms or industries doing better than average.
  • In real terms those doing less well than average or in firms or industries doing less well than average will see smaller rises or even possibly small falls.
  • This is an excellent result as it allows relative winners and losers to emerge yet without compulsory job losses.
  • Productivity rises as those workers more productive than average or in firms and industries more productive than average do better. The result is real economic growth for all.

In the 1997-2001 period job switchers (those who were recognised as being more productive) did significantly better than average – and there was a productivity boom. Between 2002-2006 the weak recovery did not see this pattern repeated, although it was emerging by 2006 just as the Fed began to apply the monetary brakes. The story post 2008 is dreadful. Monetary tightness has prevented not only any significant nominal wage growth but also any healthy differentiation – and any productivity growth to boot. It is only in the last few quarters that there has been any signs of healthy wage growth and again the beginnings of some healthy differentiation – differentiation in wage growth between job-stayers and job-switchers that leads to productivity growth.

A potential tragedy versus a potentially healthy labor market

Yet what do we see? A Fed already intent on repeating its historic 2007-2008 mistake of tightening monetary policy when on the cusp of a healthy labor market. What a tragedy! No wonder economic populism came close to winning the Democratic nomination, has won the Republican nomination and may yet win the Presidential election. Elites reap what they have sown (see Brexit). Neglect nominal GDP growth at your peril.

NAIRU: The “Holy Grail”

Tim Duy, the quintessential “Fed Watcher”, has a detailed discussion of the FOMC Minutes: This Is Not A Drill. This Is The Real Thing.  He then gives his thoughts, the last of which summarizes them:

E.) Of all the divisive points above, I think the most important is the debate over the level of full employment. The ability of the doves to slow the pace of subsequent rate hikes will hinge on their willingness to push for below NAIRU unemployment to alleviate underemployment.

Which puts the Fed in a very bad light, square in the Phillips Curve camp, with the long discredited NAIRU being the “holy grail” in determining Fed policy!

Is the FOMC about to split? Sooner the better

A James Alexander post

If it’s possible for the Supreme Court to become supremely politicized, why not the FOMC too? No area of US government is free of it.

In an election year it seems odd that the FOMC should be taking such huge risks with the economy by actively tightening monetary policy. NGDP growth is slowing horribly, and expectations have fallen too – judging by equity markets, bond yields, TIPs yields and the US dollar. The Non-Manufacturing ISM, 80% of the economy was weak, joining the already weak industrial sector.

Of course it’s even odder that the Chair is an avowed Democrat, but Yellen has long since gone native, just like Bernanke, forgetting all their pro-growth dovish bias in favor of the instinctive anti-inflation hawkishness of the Fedborg.

However, there is hope for an optimist like me. The recent minutes of the FOMC’s January meeting contained this snippet:

a few participants noted that direct evidence that inflation was rising toward 2 percent would be an important element of their assessment of the outlook and of the appropriate path for policy.

Apparently these were voting members putting down a strong market. This looks like a growing revolt of the doves.

The doves will have had their numbers and morale swelled by the arrival of Neel Kashkari. He seems a very lively  and worthy successor to Kocherlakota. He’s also young but battle hardened in actual, real, electoral politics. He doesn’t sound at all like his ultimate ambition is to be absorbed by the Fedborg into grey’dom and inflation doom-mongering. He seems in a hurry to make his mark. Officially, he’s a Republican, but doesn’t sound like the usual right wing inflation nutcase.

Doves will also have been boosted by the exit of the always-wrong Richard Fisher as his replacement seems much more balanced, and Texas needs a boost now, anyway.

The rest of the minutes was the usual dreary on the one hand this, on the other that. The epitome of the Fedborg, it’s “Policy Normalization” program only gets two mentions, thankfully.

It would all be funny,if it weren’t so tragic.The fact that the Fed can’t look in the mirror and see that its constant reiteration of being “data dependent”, is  just a constant feedback loop. They just can’t see that they cause the data to move, thinking it somehow has nothing to do with them (i.e. exogenous).

Not even someone as smart as Tim Duy can see the irony of what he correctly identifies as what is going on:

The Fed will take a pause on rate hikes. An indefinite pause. The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the the sooner they would be able to resume hiking rates. 

What? Resume hiking rates? How stupid does he think the market is? Well, maybe it was duped once, but surely not twice.

That is why it is so hard to predict a recession, because it is so hard to predict when the madmen who are in a constant feedback loop will realize they are in it and change their behavior.

Tim Duy´s prophecies

Prophecy #5:

5.) Inflation will accelerate. I think 2016 will be the year that economic resources become sufficiently scarce to push inflation back to the Fed’s target. I know this may seem like a wildly optimistic call given the persistence of low inflation during this cycle.

I would say TD is very optimistic!


My question: How can resources become “sufficiently scarce” if nominal spending growth is going down?


That´s another example of the “hare chasing the fox”, meaning it is “potential output” that is in pursuit of actual output!

Fox & Hare_2


The Fed´s gone AWOL and says “Mission Accomplished”?

Tim Duy´s bottom Line:

Bottom Line:  The Fed is set to declare “Mission Accomplished” at the next FOMC meeting.

Indeed, many policymakers have already said as much. Absent a very significant change in the outlook, failure to hike rates in December would renew the barrage of criticism regarding their communications strategy that prompted them to highlight the December meeting in their last statement.

Once they have communicated their intentions for subsequent rate hikes, they will turn their attention to the issue of normalizing the balance sheet. Even though officials have not committed to a specific path, I am working with a baseline of 100bp of tightening between now and next December, or roughly 25bp every other meeting. I expect that by the second quarter of next year they will begin communicating the fate of the balance sheet.

Whether they should hike or not remains a separate issue. Over the next twelve months we will learn the extent of which the Federal Reserve can resist the global downward pull of interest rates. Other central banks have been less-than-successful in their efforts to pull off the zero bound – not exactly a hopeful precedent.

How come “Mission Accomplished” if over the past five years nothing of relevance has changed? Don´t tell me about the “low” (maybe too low for them) rate of unemployment. That´s at least two stages removed from “relevant”. They´re only grasping at the first straw that floated down.

NGDP growth is running below average (3.8%), RGDP growth is right on average (2.1%) and core inflation is below average (1.5%)


In fact, the “Mission” was accomplished five years ago when the FOMC, after pulling the economy up by it´s hairs, decided that´s the pace they wanted it to keep!

They should be careful because the beast is showing signs of fatigue again. It needs more “fuel”, not less. But find a “better grade” one!

Beliefs are to be held forever

And Chairwoman Yellen has forever held the belief that Phillips Curve/NAIRU is the “best inflation indicator”.

In his Final Thoughts on September, Tim Duy writes:

I expect the Fed will ultimately pledge allegiance to the Phillips curve. I think they believe that stable inflation is incompatible with sub-5% unemployment if short term interest rates remain at zero. Hence, they will signal that the first rate hike is imminent.

While a BoG member in 1996, she teamed up with PC/NAIRU other big fan Laurence Meyer:

Dec/96 FOMC Transcript:

L Meyer:

A second justification for policy change would be the conviction that we are already below NAIRU and not likely to move back to it quickly enough to prevent an uptick in inflation. This is basically the staff forecast, and my view has been and continues to be that this is the most serious risk factor in the outlook. Yet, we get stuck in place because we continue to be confronted by the reality of stable to declining core inflation in the face of this prevailing low unemployment rate. So, we wait for additional data to resolve our doubts. The risk of waiting, judging from the modest rise in inflation in the staff forecast, is not very great. Still, it is probably worthwhile noting that in all of the five private-sector forecasts that I looked at, there are increases in core inflation over the next year or two. That is a pervasive tendency that just about everybody is worried about. I think we need to keep that in mind.

J Yellen

To my mind, labor markets are undeniably tight. You remarked last time, Mr. Chairman, that we should be careful not to lull ourselves into a false sense of security about incipient wage pressures by reading too much into that suspiciously low third-quarter ECI, and I agree with that. So, I still feel that we need to avoid complacency about the potential for inflationary pressures to emerge from the labor market down the road.

Sometime later, now as head of President Clinton´s CEA we read:

Yellen CEA  Report 1998

This chapter’s analysis of macroeconomic policy and performance concludes that the economy should continue to grow with low inflation in 1998. The chapter begins with a review of macroeconomic performance and policy in 1997, to show in some detail where the year’s growth came from and how inflation remained so tame. The second section examines the important question of whether our understanding of inflation and our ability to predict it have changed in significant ways. This question is part of a broader inquiry into whether the economy has changed in such fundamental ways that standard analyses of how fast it can grow without inflation need to be replaced with a new view. The conclusion reached here is that no sea change has occurred that would justify ignoring the threat of inflation when the labor market is as tight as it is now;

In a few hours we´ll know if beliefs changed!

Phillips Curve, the FOMC´s Lullaby

Just two days ago, I had something to say on the Fed and the Phillips Curve. Today, Tim Duy concludes, after a lengthy discussion of all the wrong arguments for a rate rise in September:

But if they take that risk, it won’t be because they want to send the markets a message that they are in charge, or that the “Greenspan put” needs to be put to rest, or that they can’t been seen as cowering to the markets, or that they need to stay the course because they already signaled a rate hike, or because foreign central bankers are demanding the Fed hike rates, or because they need to build ammo for the next crisis, or any other reason that comes from barstool moralizing after one too many. If they hike rates it will be for one simple reason: The recent market turmoil does little to shake their faith in the Phillips Curve. That would be the heart of their argument. And if you are arguing for September, that should be the heart of your argument as well.

Phillips Curve LullabyNo matter all the evidence against “Phillips Curvism” that has accumulated over the decades, the FOMC still finds “comfort” in it!

“Tim (ing) in”

On June 16 I wrote “The Fed and the “asymptotic approach principle”, where I commented on Tim Duy:

The Federal Open Market Committee meets this week to discuss the path of monetary policy.

Any possibility of a rate hike at the meeting’s conclusion on Wednesday was already crushed under the weight of weak data early in the year. To be sure, the data support the transitory nature of the weakness, justifying Federal Reserve Chair Janet Yellen’s optimism last month, but it remains too little, too late. Insteadturn to September as the next opportunity for the first rate hike of this cycle

In a couple of months, “Tim-In” for December…

A couple of months later (today), Tim Duy doesn´t quite chime for December, but is getting there:

Bottom Line: I have believed that there was a better than 50% chance that the Fed would move in September and am hesitant to move much below 50%. I didn’t expect the minutes would give a clear signal regarding September, and am not surprised by the dimensions of the general discussion. And I am wary the Fed may be less responsive to financial market disruption than during most of the post-crisis era given than the economy is close to their estimate of full employment. This is shaping up to be one of the most contentious meetings since the tapering debates. We will soon learn more exactly what data the Fed is data dependent on.

And I´m willing to bet that come November, December will be “getting off the table!”

Evidence that over the past year monetary policy has tightened

This recent piece by Tim Duy provides the right perspective:

I believe monetary policymakers generally concur with Ritholtz. They see zero interest rates as an artifact of the financial crisis. The economy today resembles normality—and so, too, should monetary policy. Hence the push to raise rates this year, possibly as early as the next meeting in September.

Consider instead that zero—or at least, very low—short-term rates reflect the realities of the new normal for economic growth. In this scenario, quantitative easing was the Fed’s emergency policy setting. And by ending quantitative easing, the Fed has already normalized policy.

Monetary policymakers will resist this interpretation. They do not believe that tapering and ending the bond-buying program reflects a tightening of policy.

All changes in the images take place towards the end of the QE3 taper:

The dollar broad index appreciates and 1 year treasuries go up

MP Tight_1

Oil prices tank and the stock market flattens

MP Tight_2

NGDP growth recoils

MP Tight_3

It seems US monetary policymakers have very little understanding of what monetary policy is!

Today Tim Duy was not boring!

Which he usually is on his Fed Watch blog, trying hard to “outguess” Fed moves. I did a recent take on that in THE FED AND THE “ASYMPTOTIC APPROACH PRINCIPLE”.

In an article for Bloomberg Business today he´s a completely different and much more interesting analyst. Checkout his “The Fed Is on Thinner Ice Than It Realizes, and It May Be Setting Us Up for Recession”, where he concludes:

My concern now is that the FOMC is on thinner ice than members realize because they don’t believe they have already tightened policy. The soft landing may already be upon us. They just don’t know it, or won’t admit it.

That’s a recipe for recession.

Note: My interpretation of the “soft landing already upon us” is that the economy is already as depressed as the Fed wants. To want more would mean do a repeat of 1937!