via Mike Shedlock:
Fed Chair Jerome Powell delivered a message today at the annual Jackson Hole meeting. Powell reiterated the Fed’s commitment to a 2 percent target.
Inflation: Progress and the Path Ahead
Please consider snips from Inflation: Progress and the Path Ahead by Jerome Powell at Jackson Hole, Wyoming. emphasis mine.
Today I will review our progress so far and discuss the outlook and the uncertainties we face as we pursue our dual mandate goals. I will conclude with a summary of what this means for policy. Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.
On a 12-month basis, core PCE inflation peaked at 5.4 percent in February 2022 and declined gradually to 4.3 percent in July [Figure 1, panel B – lead image]. The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.
In the highly interest-sensitive housing sector, the effects of monetary policy became apparent soon after liftoff. Mortgage rates doubled over the course of 2022, causing housing starts and sales to fall and house price growth to plummet. Growth in market rents soon peaked and then steadily declined. [figure 3 image below]
Because leases turn over slowly, it takes time for a decline in market rent growth to work its way into the overall inflation measure. The market rent slowdown has only recently begun to show through to that measure. The slowing growth in rents for new leases over roughly the past year can be thought of as “in the pipeline” and will affect measured housing services inflation over the coming year. Going forward, if market rent growth settles near pre-pandemic levels, housing services inflation should decline toward its pre-pandemic level as well. We will continue to watch the market rent data closely for a signal of the upside and downside risks to housing services inflation.
The Outlook
Turning to the outlook, although further unwinding of pandemic-related distortions should continue to put some downward pressure on inflation, restrictive monetary policy will likely play an increasingly important role. Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.
But we are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.
The labor market
The rebalancing of the labor market has continued over the past year but remains incomplete. Labor supply has improved, driven by stronger participation among workers aged 25 to 54 and by an increase in immigration back toward pre-pandemic levels. Indeed, the labor force participation rate of women in their prime working years reached an all-time high in June. Demand for labor has moderated as well. Job openings remain high but are trending lower. Payroll job growth has slowed significantly. Total hours worked has been flat over the past six months, and the average workweek has declined to the lower end of its pre-pandemic range, reflecting a gradual normalization in labor market conditions.
This rebalancing has eased wage pressures. Wage growth across a range of measures continues to slow, albeit gradually. While nominal wage growth must ultimately slow to a rate that is consistent with 2 percent inflation, what matters for households is real wage growth. Even as nominal wage growth has slowed, real wage growth has been increasing as inflation has fallen.
We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.
Uncertainty and Risk Management along the Path Forward
Two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time. It is challenging, of course, to know in real time when such a stance has been achieved.
Conclusion
As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data. Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labor market conditions that benefit all.
We will keep at it until the job is done.
Figure 3 Rental Prices
Key Points
- The Fed is committed to a 2 percent inflation target
- Powell mentioned “carefully” twice.
- “Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”
- The Fed will watch rent data closely for a signal of the upside and downside risks to housing services inflation.
- “What matters for households is real wage growth. Even as nominal wage growth has slowed, real wage growth has been increasing as inflation has fallen.”
- Total hours worked has been flat over the past six months, and the average workweek has declined to the lower end of its pre-pandemic range, reflecting a gradual normalization in labor market conditions.
I have recently discussed many of those points.
Atlanta Fed and BLS Real Measures
Real means adjusted for inflation using the CPI as the measure of inflation.
Real wages are ticking up. To the extent real wages are rising more then productivity, the net impact is inflationary.
For discussion, please see Wages for New Hires are Falling, But the Impact is Negligible
My lead comment and the chart I posted both hit the mark.
Lead comment: “Falling wages for new hires only won’t appease the Fed.”
Pipeline Theory of Falling Rents
The pipeline theory of falling rent based off new leases has been wrong for 18 months.
The rate of increase in the price of new leases fell for three months then went outright negative for five consecutive months. There was a similar setup at the end of 2021.
Now the alleged “pipeline” theory of rent has been rising for six consecutive months.
It’s long overdue we toss away using the price of new leases as any sort of leading indicator of anything.
How Many Hours Are People Working Now vs the Pre-Pandemic?
As with Powell, I too have noticed the declining workweek.
Peak Weekly Hours
Weekly hours generally peaked sometime early in 2021. Retail trade weekly hours peaked in November of 2021. Total private weekly hours peaked at 35.0 hours in January of 2021 and has been sliding ever since.
Seven-tenths of an hour multiplied by the current employment level of 161,262,000 is 112,883,400 hours. At the current average work week of 34.3, that’s the equivalent of 3.29 million employees!
Let that sink in. At the reduced work week compared to January of 2021, the economy needed to add 3.29 million employees just to break even on hours worked.
Index of Aggregate Hours
How Many Hours Are People Working Now vs the Pre-Pandemic?
Powell commented “Total hours worked has been flat over the past six months, and the average workweek has declined to the lower end of its pre-pandemic range, reflecting a gradual normalization in labor market conditions.“
I noted the same thing in real time.
For details, please see my August 4, 2023 post How Many Hours Are People Working Now vs the Pre-Pandemic?
Hoot of the Day
It took an increase in employment of 1.07 million (1.34 million jobs) to work the same number of aggregate hours in July of 2023 as January of 2023.
Thus, strong jobs is really a function of the desire of employees to work fewer hours and/or employers fearful of any layoffs so they schedule a shorter work week for their employees.
For more on today’s job report please see For the Second Month, the Jobs Report Falls Short of Lofty Expectations
Everything Powell said today related to jobs, I discussed in real time.
Powell’s Warnings
Here is the key thing Powell said today: “As is often the case, we are navigating by the stars under cloudy skies.”
And to that I would add, using tools like inflation expectations proven to be totally worthless.
For discussion of inflation expectations and Biden’s energy goals guaranteed to be inflationary, please see Should the Fed Declare Defeat and Move On?