US labor market data is a particular focus of attention for the US Federal Reserve. Their logic behind this: due to stable employment figures like the current ones, consumers spend money, which drives up inflation and thus leads the Fed to pursue a restrictive interest rate policy. But why is the US Federal Reserve so one-dimensional?
The Federal Reserve has made it the cardinal criterion for price increases and its monetary policy: labor market data. But are they really that important?
Fingers crossed: that's why the estimation error of the working data is so large
First of all, how can the United States, with its inefficient administration, have official labor market figures at the end of each month? Simple answer: thank you, thumbs up.
The number of new jobs created is calculated by the Department of Labor by surveying approximately 150,000 public and private businesses each month to determine whether and, if so, how many people have been hired or fired. Although this does not even account for one million jobs out of a total workforce of over 161 million, this data is still extrapolated to all employees in the US. This method is impure because the population is statistically too small. In this sense, the estimation error is large.
In fact, the labour market report by the US private provider ADP, which is produced a few days before the official data on new jobs, often shows marked differences, as if they were from two different countries. And after a month, reality catches up with the estimated data and, in some cases, massively corrects them.
Workforce? A farce of a workforce!
The calculation of the official unemployment rate is also based on shaky ground. The calculation is based on the number of people available for work, which in American terms is known as the “labor force.” This labor force is more of a labor sham.
For example, citizens who no longer register as unemployed because they no longer receive state support are not taken into account. But people who work part-time and would like to work full-time are also left out of the statistics. The reality of the labour market is being overlooked, which is not surprising from a political perspective. However, other data providers, such as Shadow Government Statistics, report significantly higher unemployment rates in the USA.
These numbers should not necessarily be taken at face value either. Overall, however, it is clear that shotgun-like labor market data cannot be a reliable basis for assessing consumption and inflation.
The labor market is the effect, not the cause
From an economic perspective, labour market data react late. The comparison with a refrigerator is appropriate. If the cooling is set to a higher level, the temperature initially does not change. However, the longer the cold lasts, the colder the contents of the refrigerator become.
Similarly, the US Federal Reserve must also plan for the effects of cooling its interest rates. It must assess in advance when it will raise the temperature regulator again so as not to freeze the labour market.
A cautionary tale for Frost: Former Federal Reserve Chairman Ben Bernanke sharply raised key interest rates from 1 to 5.25 percent between 2004 and 2006 and left them there for too long. In the end, inflation was low, but so was the labor market. The policy rate then had to be cut to zero percent to improve employment again.
This also shows that the labour market cannot play a unilateral determining role in the setting of interest rates by the Federal Reserve. It is even daring to use it as the basis of US monetary policy.
By the way, labour market data should always be related to productivity. If it is high, even a high level of employment cannot fuel inflation.
Labour market data as a playing field for stability policy, but where the ball is missing
The US Federal Reserve has all these conclusions too. But why does it still carry labour market data around the financial world like a safekeeping?
With the inflationary emphasis on stable employment and the corresponding painting of the devil of inflation on the wall, the impression is created of a central bank that is ready to act and always focuses a critical eye on price stability. And this message is clearly resonating with investors. Every time you look at jobs data like a rabbit looks at a snake.
But hand on heart, dear Fed directors: even official inflation is still above three percent, not to mention real inflation. And in view of the dramatic economic stimulus programs, which will happily continue even after the presidential election, inflation will continue to be fueled. Regardless of the development of the labor market, interest rates should have become even more restrictive long ago.
However, with a view primarily to the US debt overhang, but also to maintaining a soft landing scenario and remaining economically defensible vis-à-vis China, a strict policy of interest rate hikes is no longer possible today. The Federal Reserve will never be able to say that ex cathedra. This would mean that the world's most important central bank would remove its halo of stability.
One must act as if one were pretending to be willing to act in terms of stability policy without acting consistently in terms of stability policy. It is a game without interest and the labour market data provide the right ground for it. Well, monetary politicians are just politicians.
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