Federal Reserve risks payrolls to chase an inflation ghost
By Ray Dombrowski · Reporting from Youngstown ·
The Federal Reserve is wrong. It is prioritizing a theoretical inflation target over the actual payrolls of American workers. In September, the U.S. economy added 29,000 jobs. This number is a warning. It is not a sign of stability.
The Federal Reserve is wrong. It is prioritizing a theoretical inflation target over the actual payrolls of American workers. In September, the U.S. economy added 29,000 jobs. This number is a warning. It is not a sign of stability.
The payrolls are lying to the Fed
The Bureau of Labor Statistics released the data. According to The Korea Herald, nonfarm payrolls increased by 29,000 in September. This was a sharp miss. CNBC reports that estimates were for more than 80,000.
The unemployment rate ticked up to 4.2%. The Federal Reserve views this as a stable market. I view it as a leak in the hull.
Annual wage growth has slowed to 3%. When wages stall while prices stay high, the worker pays the difference.
A view from the boardroom
The Federal Reserve is obsessed with its 2% inflation objective. Beth Hammack, president of the Federal Reserve Bank of Cleveland, notes that the Fed has missed this mandate for more than 5.5 years.
Hammack sees a shortage of electricians in the Fourth District. She points to growth in data centers and construction. But a shortage of specialized trades is not the same as a healthy payroll.
Hammack spent three decades at Goldman Sachs. She ended her time there as co-head of global finance. That is a boardroom perspective. It is not the perspective of a man running a shear in a fabricating shop.
The Fed's advocates argue that price stability is the only way to ensure long-term growth. They claim that ignoring the inflation target would lead to a currency collapse. But that logic fails when the payrolls stop. A worker cannot eat a stable currency.
The ghost of the Volcker Shock
The Federal Reserve raised interest rates by a quarter percentage point. This is the Volcker Shock in slow motion.
The mechanism is the same. The Federal Reserve accepts short-term payroll pain and higher unemployment to break a multi-year inflation cycle. Paul Volcker did this throughout the 1970s and early 1980s to end high levels of inflation.
The difference now is the lack of a clear victory. The Fed is hiking into a cooling market.
Traders are now betting against another hike in October. The CME FedWatch tool shows a 17% chance of a hike. Kalshi prediction markets put it at 18%. The market sees the cliff. The Fed is still driving toward it.
The historical pattern shows that the Fed often waits too long to stop tightening. They treat the labor market as a trailing indicator. They wait for the spreadsheet to turn red before they move.
The Federal Reserve is betting that 29,000 jobs is enough to keep the country running while they chase a percentage point. They are treating the American worker as a rounding error. If the December hike happens, they are not fighting inflation. They are fighting the people who actually do the work.
US unemployment rate%22%2C%22fill%22%3Atrue%2C%22pointRadius%22%3A0%2C%22borderWidth%22%3A2%2C%22tension%22%3A0.2%7D%5D%7D%2C%22options%22%3A%7B%22plugins%22%3A%7B%22legend%22%3A%7B%22display%22%3Afalse%7D%2C%22title%22%3A%7B%22display%22%3Atrue%2C%22text%22%3A%22US%20unemployment%20rate%22%7D%7D%2C%22scales%22%3A%7B%22x%22%3A%7B%22ticks%22%3A%7B%22maxTicksLimit%22%3A6%7D%7D%7D%7D%7D)
US unemployment rate. Source: Federal Reserve Economic Data (FRED).