Just two days after Federal Reserve Chairman Jerome Powell chose to keep interest rates unchanged, the Bureau of Labor Statistics released some disappointing news regarding the US economy.
In July, job creation fell significantly short of expectations, with adjustments revealing a weaker job market in both May and June. The unemployment rate for July now stands at 4.2%.
It’s evident that Powell and the Fed have been striving to curb economic growth—and, well, they seem to be succeeding.
Although Powell won’t concede this point, it’s clear that the Fed’s stringent monetary policies are hindering economic expansion.
It almost feels like a shocking repeat of history; Powell indicated on Wednesday that the Fed isn’t ready for a rate cut, especially since both unemployment and inflation are hovering just above the Fed’s 2% target. Even after the Fed had previously lowered rates three times last fall, inflation continued to “creep up,” as noted in earlier statements. It’s intriguing how the Fed seems to have shifted its narrative since the Trump administration.
Last Friday, the payroll numbers contradicted Powell’s optimistic outlook. The addition of just 73,000 jobs in July fell far below the anticipated 110,000. On top of that, the Labor Statistics Bureau revised down job figures for both May and June, showing a drop from 291,000 to a meager 33,000.
Clearly, the economy has been faltering since January 2021, following fiscal strategies that many consider unsustainable. The Fed played a part in fueling 2020s inflation by offsetting the immense federal deficit and increasing debt. Between January 2021 and April 2022, the money supply rose by 12.3%. The Fed fund rate lingered around 0.08% until March 18, 2022.
Currently, the Fed’s target interest rate is set at 4.33%, which is significantly higher than rates throughout the 2000s, except for the lead-up to the 2008 Great Recession.
Seeking Greater Accountability
The central bank is trying to address inflation spikes seen during the Biden administration and is determined to prevent any resurgence. Over the past three years, the Fed has tightened its monetary supply through elevated interest rates and asset sales, leading to a slowdown in monetary expansion.
Interestingly, despite these challenges, the federal budget has managed to remain stable, even recording a small surplus in June, which alleviates some inflationary pressure. While this surplus is likely temporary, a consistent downturn in this trend could be expected without further economic stimulation and increased spending from Congress.
Powell appears to have given up on promoting growth through lower interest rates. Instead of accepting responsibility for the consequences of his inflation policies tied to Biden’s administration, he’s shifted blame towards tariffs and the labor market amid rising inflation.
The Fed seems to be looking at the current landscape with a sense of optimism, assuming that reduced job security for workers will lead to inflation. Yet, these perspectives overlook a fundamental truth: inflation represents a widespread increase in prices, not just shifts in specific sectors. If tariffs drive up the cost of imported goods, prices across other areas should decrease unless the total money supply is increased, which seems to be the Fed’s doing.
So, when wages rise, it’s either due to improved productivity or businesses struggling to maintain those wage levels. If wages go up without a corresponding growth in efficiency, prices of other goods should drop as consumers have less overall purchasing power, unless the Fed expands the money supply again.
Impact on Economic Recovery
It’s tough to absolve the Fed from being part of the issue with inflation.
While President Trump and Congressional Republicans worked to mitigate the consequences of pandemic-related fiscal and regulatory mismanagement, the US economy surprisingly grew at a robust 3% annual rate in the second quarter. This reflects a positive reaction to the extension of tax cuts and deregulation initiatives from the past six months.
If given the chance, the recent continuation of tax cuts from 2017, along with swift actions by the Trump administration to revitalize industry, could significantly bolster the economy. Unfortunately, it seems the Fed is intent on hindering a full recovery.
Powell stated, “I don’t think we see a weakening in the labor market,” just two days before disappointing figures emerged from the Bureau of Labor Statistics.
“While demand for workers is slowing, the supply is also following suit… wages are gradually easing,” he added.
However, the evidence suggests otherwise—the job market isn’t as strong as he implies. The Fed’s efforts to curb growth seem quite effective.
Encouraging Economic Space
This indicates a necessity for the Fed to gradually ease its constraints, allowing for some growth within federal fiscal and regulatory domains. A careful watch on the situation is, of course, essential.
Moreover, continuing gradual reductions in the central bank’s balance sheet, which had nearly doubled during 2009 and expanded during the latter Obama years and the pandemic, will help temper inflation without stifling economic progression.
Despite the imperative for serious federal fiscal reforms, tightening the economy through strict monetary policy doesn’t seem like the right solution to ongoing economic troubles.
