December jobs report highlights Fed mistakes
The Fed may not have a good reputation. Burning out as quickly as Los AngelesBut the outcome is likely to be the same: rubble, ash, condemnation, and expensive reconstruction.
The Labor Department said Friday that the U.S. economy is 257,000 jobs added in Decemberexpectations that job growth would fall to around 150,000 jobs were dashed. The report far exceeded expectations, with economists posting estimates ranging from 125,000 to 200,000. None of the economists surveyed by Econoday saw their unemployment rate fall, and several saw their unemployment rate rise, even though the rate fell to 4.1%.
When the Fed announced Significant rate cut in SeptemberFor the first time since Joe Biden was too slow to respond to the spike in inflation that began shortly after President Joe Biden took office, he argued that interest rates are too high and unnecessarily put jobs at risk. Fed officials maintained that their monetary policy stance was “restrictive” and that easing would only move interest rates back toward neutral.
One key pillar of this view was the idea that real interest rates rose dramatically as nominal targets were fixed and inflation fell. This was seen as A kind of automatic tightening. The Fed believed this would continue as inflation continued to fall unless it cut rates to keep real interest rates in line with falling inflation. At its September meeting, it predicted the unemployment rate would rise to 4.4% and remain that high until the end of 2024.
The idea lies in smoldering ruins. The economy has added an average of 192,000 jobs a month since September, even including a disastrous October report dragged down by labor unrest and severe hurricane damage. The unemployment rate has barely improved and remains at what the Fed currently considers a long-term trend. and this labor market strength The economy continues to thrive despite a sectoral recession in the manufacturing industry, with production cuts, orders falling, and fewer jobs.
Defenders of the Fed's actions say this is evidence that the Fed's interest rate cuts are working to stem the economic downturn. But that would require belief that monetary policy affects the real economy almost instantly, contrary to decades of evidence that Fed policy works with long and variable lags. A better argument is The Fed was simply wrong in predicting a weakening labor market..
Bond markets reject Fed view
The bond market roundly rejected the Fed's view. Of course, the Fed can control the target overnight interbank reserve lending rate. However, long-term interest rates are not directly controlled by Fed policy. Instead, it reflects: What the market sees as the likely path for future policy ratesThis reflects what investors are expecting when it comes to data on inflation, unemployment, and the Fed's reaction to that data.
If the market had been convinced that the Fed was right, long-term yields would have fallen once the Fed started cutting rates, or at least stayed flat if they fell in anticipation of Fed easing. Instead, The yield on the 10-year Treasury note rose about 110 basis points. Since the Fed rate cut in September. The federal funds futures market is essentially pricing in the chance that the Fed's target will reach the 3.4% expected in September by the end of 2025.
Even the Fed's revised view is now viewed as unlikely, as seen in its December outlook to achieve the 3.9% federal funds target by the end of 2025, and the market is Only about one-third suggest that. Markets are now suggesting that the Fed may be able to: I will make another cut this year.And I'll probably never cut it again.
Consumer inflation expectations have soared, highlighting the Fed's mistakes.
“Year-ago inflation expectations rose from 2.8% last month to 3.3% this month,” University of Michigan economist Joan Hsu said in the January Consumer Sentiment Bulletin released Friday. “The current reading is the highest since May 2024 and above the 2.3-3.0% range seen in the two years before the pandemic. Long-term inflation expectations are 3.0% this month, up from 3.0% last month. This is the third time in the past four years that long-term forecasts have changed this much in one month.
Experts worry that the Trump administration's policies pose a threat to the Fed's independence. The real threat to the Feds came from inside the house.. The question now is whether Jerome Powell will be able to protect his reputation and restore the credibility of the financial institutions he leads in time, and how devastating the Fed's reversal will be on markets and the economy. It is.
