NAIRU

Macro Perspective: Fri 05 Nov 21

The October jobs report comes in today. As of yesterday, this report and the coming monthly job reports will be a lot more important.

Jay Powell has tried to take the focus off of inflation, which he admitted was hot, by telling us that they (the Fed) aren't thinking about an interest rate liftoff, in response to inflation, because we aren't at "maximum employment."

Here are his words, exactly: "We don't think it's time yet to raise interest rates. There is still ground to cover to reach maximum employment both in terms of employment and in terms of participation."

Stating that a condition of maximum (or full) employment is necessary to clear the path for setting just a positive (i.e. not zero) interest rate for our economy, is hard to comprehend.

Keep in mind, the unemployment rate from last month's report dropped to 4.8%. That's very close to the long-term average unemployment rate, and it's very close to "NAIRU," which is what the Fed believes to be the "Non-Accelerating Inflation Rate of Unemployment. This is the level of unemployment, below which inflation would be expected to rise. That's probably not a level you want to dance around, in an economy that's already producing hot inflation.

For perspective, when the Fed started raising rates in December 2015, following the financial crisis and three rounds of QE, the unemployment rate was higher than it is now. Economic growth was lower, and inflation was lower (much lower).

So, there is debate about whether the Fed has it wrong.

Knowing the history of the Fed, especially the history of the post-financial crisis environment (the past thirteen years), they aren't trying to be right, they are trying to manipulate public perception in a way that gives them, in their view, the best chance to execute on their objectives, without changing consumer confidence/behaviors and market stability.

With that, as we've discussed, we have to watch what they do, not what they say. In this case, they've just started tapering their emergency bond purchase program (QE) - they did it sooner, and are telegraphing a faster timeline than most would have expected just a couple of months ago.

The liftoff for rates will likely be the same - sooner and faster.