Bloomberg today has several articles in which prominent economists react to today’s strong jobs report. This is the president of the Chicago Fed. austin goolsby:
Chicago Fed President Austan Goolsby praised the strong September employment report, but warned against placing too much hope on one month’s worth of data, warning that there is a risk that inflation could fall below the central bank’s 2% target. He added that there is.
“Today’s payroll numbers, and the whole report, is a great report,” Goldsby said in an interview with Bloomberg TV’s Michael McKee on Friday.
And here it is larry summers:
Former Treasury Secretary Larry Summers said: federal reserve systemLast month’s decision to cut interest rates was a mistake after new data showed US employment health growth Last month exceeded all expectations.
“In hindsight, the 50 basis point cut in September was a mistake, even though it didn’t have huge consequences,” said Summers, a paid contributor to Bloomberg TV. post With X.
Nonfarm payrolls rose by 254,000 in September, the most in six months. The unemployment rate fell to 4.1% and hourly wages rose 4% from a year earlier, according to Bureau of Labor Statistics figures released Friday.
I’m with Summers. While it is true that inflation may temporarily fall below the 2% target, it is likely that (if it occurs) it will be due to a positive supply shock. The Fed should focus on demand-side inflation, and all the evidence I’ve seen points to continued strong growth in NGDP and nominal wages. It is not true that the entire report is a great report. Twelve-month nominal wage growth accelerated to 4%, which is too high. Further monetary restraint is needed to sustainably reduce the inflation rate to 2%.
I think Mr. Summers is right that a smaller rate cut would have been better, and he’s also right that the mistake probably wasn’t that big. If the Fed has made a major mistake (and it’s too early to reach that conclusion), it’s in going too far in setting the federal funds target too low at 0.25% in one meeting. This is likely due to expansive forward guidance. Most of the market-oriented forward indicators look very good, so at this point I’m going to give them the benefit of the doubt. But it’s clear that the mini-panic over the labor market a few months ago was premature. We weren’t teetering on the brink of recession.
In my view, Fed hawks and doves make the same mistake, responding asymmetrically to supply shocks depending on whether the effects support their policy preferences. Therefore, dovs tend to correctly discount the spike in inflation due to a decrease in aggregate supply, while ignoring the importance of lower inflation due to an increase in aggregate supply. The Hawks make the opposite mistake. Aggregate supply conditions have been very favorable recently, resulting in headline inflation being lower than core inflation (and lower than expected from NGDP growth or nominal wage growth). This is unlikely to continue.
The only “flexible average inflation targeting” regime that works in the long run is a stable NGDP growth rate of about 4%. Although we are not there yet, the Fed has made significant progress since the very high inflation of 2022.
