Worker Shortage, Inflation, And RatesBrian Langis
Job openings soared to a record 9.3 million in April as the economy reopened but 3.5 million Americans are still on weekly jobless benefits and more than 9 million remain unemployed. The economy is still 7.6 million jobs short of pre-pandemic levels.
The numbers are very contradictory. This means the U.S. is experiencing high unemployment at the same time as a labor shortage. There are many reasons for the hiring scarcity like shifting employment choices, programs such as enhanced unemployment benefits, lingering COVID-19 worries, unqualified labor, and the need to raise wages. The last job report indicated that wages are rising.
I didn’t look up the numbers for Canada but I’m sure we are in a similar situation. A quick tour around town shows a number of restaurants, small businesses that have restricted their hours, that aren’t serving lunch, or aren’t open at all because of the workforce shortage.
The solution is a set of policies to help train more people for in-demand jobs, remove barriers to work, and attract legal immigrants. Also we need new efforts to connect employers to undiscovered talent.
Inflation is the big word on the block. I don’t need to remind you that prices are rising everywhere. The main question is will it stabilize, go higher, or go away? The answer to that will help determine the direction of interest rates.
There are different schools of thought on the topic of inflation. On one side, you have the Fed saying that inflation is “transitory”. The source of inflation is supply related. Solve the supply shock and you solve inflation. There is some truth to that. Take lumber prices, the symbol of inflation during the pandemic. It fell 14 of the last 16 trading days. It’s down 41% since its peak in May ($1,711 thousand board feet vs $1,009 yesterday). Copper prices are falling. The semiconductor shortage is getting fixed too. The only exception is oil. Oil continues to hold the line above $70/barrel. But oil was always it’s own different beast. Under Fed’s school of thought the inflation problem will solve itself once the supply shock is fixed. The market seems to have bought that narrative with the 10-year bond yield falling.
But that can’t just be it. It’s more than just supply chain bottlenecks. I think downplaying concerns about inflation is dangerous. Wages are increasing (see paragraph above), so this suggests that some of that “transitory” inflation is here to stay. The world central banks also flooded the market with cash with no indication of taking off the foot off the accelerator. 30%+ of the U.S. money supply was printed during the pandemic. The government is not reigning in spending any time soon. If history provides any indication, this will not end well, as an economic 101 textbook will tell you. What helps in this case is the U.S. is currently the world’s reserve currency. If it were to lose that status, to something like Bitcoin (I know outrageous thinking but cryptos are a thing), interest rates would increase and limit government borrowing.
The Fed has a big meeting today and a policy announcement later in the afternoon. Nobody expects a change in rates (now at 0.0%-0.25%) but the market will look for clues on when it will slow its aggressive asset purchase program ($120 billion/month). I think the market will really be looking at the set of economic projections mapping out forecasts for economic indicators like inflation and unemployment. The dot-plot chart shows expectations on when Fed officials expect interest rates to start rising. So far the economists consensus is around 2023-2024.
I find that hard to believe. Another 2-3 years of more gung-hoing? You telling me the economy can’t support a 0.25% raise in the next 2-3 years? With inflation gathering speed, a job market tightening, and the economy improving, I’m not sure what else policy makers need. Is this even responsible? Are they waiting for the market to overheat? If there’s overeating and rates start to spike, there will be enormous risks to an already fragile and over leveraged global economy.
The key here is for Powell to communicate clearly and not make any surprises (2013 taper tantrum due to sudden policy change). Powell needs to give advance notice of when it plans to trim its asset purchases. Also the Fed need to be careful on trying to paint themselves in a corner with their inflation is only “transitory” position. They should soften their stand on that.
Joe Biden is the fifth President to meet Vladimir Putin (Clinton was the first).There’s already a history between both leaders. Biden was VP and former Chairman of the Senate Foreign Relations Committee. He knows what’s up. If this meeting helps defuse the tension between both countries, then good.
Republicans have attacked Biden for giving Putin an undeserved audience. I don’t know about that. Russia is a major power with influence. Biden knows exactly who’s meeting.They both called each other “killer”. So it’s not like Biden is bringing roses to a tea and cookie meeting (plus the tea might be poisoned).
Politicians are hard to take seriously. It’s funny how the table changes when another party is in power. Where was the Republican criticism when Trump met Kim Jong-un without any conditions? Or Putin? I get it. They are playing political games. Democrats did the same thing (acting tough on Russia when Trump was in power).
Political games aside, there’s serious business on the table. It’s good that they meet face to face. I don’t expect much from the meeting. But if it can help defuse tension a bit, the better. The U.S. and Russia both have a lot to address (Ukraine, nuclear, cyberattacks, election meddling, Alexey Nalvany etc…). This is not a Hilary Clinton “reset” moment.
There’s no reset here. I think Biden will make it clear where the U.S. stands. If Russia wants to play cyberattack games, the U.S. can too. If the meeting ends with more stable relations and a roadmap to addressing major issues, then I would call that a good meeting.
The Cold War was what it was because of the almost non-existent communication between both powers. Both sides thought the other side wanted to blow them up.
Article by Brian Langis