Labor Report Shows Huge Danger in Fed's Tight-Money Policy

Jerome Powell and the Federal Reserve appear to have been doing their best to suppress economic growth. The new employment numbers put the lie to Powell's conflation of growth and inflation.

Two days after Federal Reserve Chair Jerome Powell announced the central bank’s decision not to reduce interest rates, the Bureau of Labor Statistics announced bad news about the U.S. economy. Employers added many fewer jobs than expected in July, revised numbers showed that employment and hiring were weak in May and June, and the unemployment rate ticked up again in July, reaching 4.2 percent.

The economy added 73,000 jobs in July, far below the 110,000 economists had expected.

The original numbers for May and June were wild overestimates, The Washington Post reports:

Large cuts to earlier job counts erased 258,000 positions originally reported for May and June. Friday’s revised tallies were the biggest two-month downward revisions in modern history outside of the pandemic.

The revisions cut the reported job-addition totals for May and June from a healthy 291,000 to a dismal 33,000.

President Trump announced the firing of BLS Commissioner Erika McEntarfer on Friday, shortly after the new numbers were announced. “She will be replaced with someone much more competent and qualified,” Trump wrote in a Truth Social post.

That will be widely characterized as “retaliation” and “killing the messenger,” I’m sure. However, the BLS and other federal agencies regularly painted misleading economic pictures throughout the Biden years, reporting rosy, positive numbers and then correcting them a month later when everyone’s attention was diverted by the next set of false, overly positive numbers. I wrote about that regularly last year, and I welcome the president’s decision to hold someone responsible for those falsehoods, hoping that it is merely the first of many such.

Trump has also been regularly discussing his displeasure with the performance of Federal Reserve (Fed) Chair Jerome Powell. The central bank certainly helped make Trump’s case on Wednesday, although presumably without intending to do so. Powell announced that the Fed would hold the fed funds rate steady for at least another month, thus keeping interest rates 54 times higher than they were early in the Biden administration (0.08 then, 4.33 percent now).

I cite those numbers merely for comparison, as I do not approve of zero or near-zero interest rates. Clearly, however, there is a lot of room for rate cuts without approaching irresponsible NZIRP levels.

The economy has clearly been wobbly since January 2021 under the tax-and-spend-and-borrow-greedily Biden-era fiscal policies. The positive effects of the recent extension of the 2017 tax cuts and the Trump administration’s rapid moves to deregulate industry and energy have been offset by worries about tariff effects and the necessary time lag between economic liberalization and the growth it inevitably fosters.

All of this was evident long before Friday, even though an assortment of official numbers indicated the economy was beginning to struggle out of the Biden-era doldrums. While strongly endorsing the tax cut extension and deregulation and arguing that they will go far in reviving the economy, I have continually expressed my concerns that the Fed would thwart a full recovery by keeping interest rates too high, making that argument again in last week’s issue of this newsletter.

Unfortunately, that appears to be coming to pass. In an impressive “Dewey Defeats Truman” moment, Powell on Wednesday said the Fed was not ready to lower interest rates because unemployment is low and inflation is slightly above the Fed’s stated goal of 2 percent a year. That is interesting because the Fed lowered its target interest rate three times last fall, to its current level, even though inflation remained “somewhat elevated” at the time, as the Fed put it.

Powell has regularly argued that President Donald Trump’s tariffs will unleash inflation and that the labor market is strong, which he perceives as another potential source of inflation.

Both of those arguments ignore the simple fact that inflation is a general rise in prices, not price increases in specific sectors of the economy. If tariffs cause the prices of imported goods to rise, prices of other things must fall, unless someone increases the overall money supply—and that would have to be the Federal Reserve itself. The central bank has been doing the opposite since last summer, it is important to note: even when it cut the federal funds rate last fall, the Fed still kept selling securities, which tightens the money supply … and raises interest rates.

Similarly, if wages rise, it must be because productivity is rising, or businesses would not be able to afford to pay higher wages—unless somebody increases the overall money supply, which again points to the Fed. If businesses decide to pay the higher wages even if output per worker is not rising, prices of other things must fall, because that money is no longer available for purchasing or investing in those things—unless the central bank increases the money supply.

Try as he might, Powell cannot exonerate the Fed for the struggles with inflation. Still, he persists, blaming tariffs and workers for the slightly elevated inflation which is in fact simply a holdover from the Biden administration’s massive expansion of the federal deficit that the Fed monetized, increasing the money supply by 12.3 percent between January 2021 and April 2022 and holding the fed funds rate around 0.08 percent until March 18, 2022, when it raised it to 0.33 percent. The rate is now 4.33 percent.

“You do not see a weakness in the labor market,” Powell said in his Wednesday press conference, two days before the dismal truth about the labor market was released. “Demand for workers is growing, but so is the supply. … Wages are gradually cooling.”

We now know why wages have been cooling while the labor market was strong: the labor market was not strong. Powell and the Fed have been doing their best to stunt economic growth. They are succeeding at that.