This week gave us two big pieces of economic news.
First, after wrapping up on their two-day meeting on Thursday, Federal Reserve officials announced that they would not hike interest rates and signaled they would pause further increases going forward, in light of recent turbulence in the financial markets, signs of trouble with global growth, and relatively muted inflation. The shift relieved investors and sent stocks rocketing higher.
Then, on Friday, the Department of Labor delivered an unexpectedly strong jobs report. Employers added 304,000 workers to their payrolls in January, compared to the 170,000 forecasted by economists surveyed by Dow Jones. Companies mostly seem to have shrugged off this winter’s government shutdown. In fact, the numbers showed that hiring has sped back up after a lull in the summer and early fall. The economy tacked on an average of 241,000 jobs over each of the last three months, compared to an overall monthly average of 205,000 since the beginning of 2017.
One way to look at these two pieces of news is that the Fed has been worrying about nothing, and that it can safely get back to hiking rates like before. As Politico’s Ben White put it:
If anything, though, I’d say opposite is true. The fact that employers can still find hundreds of thousands of people to hire each month suggests that, even in an economy that seems pretty hot, there are still plenty of Americans who want or need work. The Fed is right to take a breather before trying to cool down the economy in order to prevent inflation.
Over the years since the Great Recession, the Federal Reserve has consistently underestimated the amount of “slack” left in the labor market—essentially, how far joblessness can fall before employers have to start paying significantly higher wages in order to hire, which could cause inflation to pick up. One major reason why is that Fed economists have traditionally looked at the official unemployment rate as a guide to the economy’s condition. Headline unemployment has dropped to historic lows, which at one time might have meant that almost everybody who really wanted a job had one. But today, the statistic no longer seems to accurately reflect how many Americans who would like to work if they could find the right opportunity, or who simply wanted more hours. As a result, there have consistently been more adults ready to take a job than our central bankers realized. Fed officials keep thinking they’re about to run out of slack—and that inflation will surely pick up—only to discover they’ve got plenty more rope left in the economy.
Notably, nobody has been a louder critic of the Fed’s excessive hawkishness than our president, Donald Trump. He might not understand the nuances, and is likely concerned mostly with keeping the economy hot so his poll ratings stay out of the thirties, but he’s been uncharacteristically lucid about the Fed’s unnecessary tightening. (His inability to pick Fed officials who’s views he actually agrees with notwithstanding).
Today’s giant jobs report doesn’t tell us for sure that the labor market will have more slack going forward. But it does confirm, yet again, that Fed officials have been too pessimistic in the past about how much room the job market has had to grow. Meanwhile, plenty of data points, such as the share of Americans in their prime working years who are employed and the speed at which employers are raising salaries, are signaling that the country still has a long while to go before employers have to worry about anything resembling a labor shortage. Taken together, it all suggests our monetary policy makers are right to sit back, stop trying so hard to snuff out inflation before it flares up, and let companies keep their hiring signs up. Good jobs numbers, like today’s, are a hint that the economy could be even better.
Or, in other words, they show that Donald Trump has been kind of right about the Fed.
