Category: Macroeconomics

Surprisingly Strong Jobs Report

Photo courtesy of Lena Buonanno.

This morning of Friday, February 2, the Bureau of Labor Statistics (BLS) issued its “Employment Situation Report” for January 2024.  Economists and policymakers—notably including the members of the Fed’s Federal Open Market Committee (FOMC)—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best gauge of the current state of the labor market.

Economists surveyed in the past few days by business news outlets had expected that growth in payroll employment would slow to an increase of between 180,000 and 190,000 from the increase in December, which the BLS had an initially estimated as 216,00. (For examples of employment forecasts, see here and here.) Instead, the report indicated that net employment had increased by 353,000—nearly twice the expected amount. (The full report can be found here.)

In this previous blog post on the December employment report, we noted that although the net increase in employment in that month was still well above the increase of 70,000 to 100,000 new jobs needed to keep up with population growth, employment increases had slowed significantly in the second half of 2023 when compared with the first.

That slowing trend in employment growth did not persist in the latest monthly report. In addition, to the strong January increase of 353,000 jobs, the November 2023 estimate was revised upward from 173,000 jobs to 182,000 jobs, and the December estimate was substantially revised from 216,000 to 333,000. As the following figure from the report shows, the net increase in jobs now appears to have trended upward during the last three months of 2023.

Economists surveyed were also expecting that the unemployment rate—calculated by the BLS from data gathered in the household survey—would increase slightly to 3.8 percent. Instead, it remained constant at 3.7 percent. As the following figure shows, the unemployment rate has been remarkably stable for more than two years and has been below 4.0 percent each month since December 2021. The members of the FOMC expect that the unemployment rate during 2024 will be 4.1 percent, a forcast that will be correct only if the demand for labor declines significantly over the rest of the year.

The “Employment Situation Report” also presents data on wages, as measured by average hourly earnings. The growth rate of average hourly earnings, measured as the percentage change from the same month in the previous year, had been slowly declining from March 2022 to October 2023, but has trended upward during the past few months. The growth of average hourly earnings in January 2024 was 4.5 percent, which represents a rise in firms’ labor costs that is likely too high to be consistent with the Fed succeeding in hitting its goal of 2 percent inflation. (Keep in mind, though, as we note in this blog post, changes in average hourly earnings have shortcomings as a measure of changes in the costs of labor to businesses.)

Taken together, the data in today’s “Employment Situation Report” indicate that the U.S. labor market remains very strong. One implication is that the FOMC will almost certainly not cut its target for the federal funds rate at its next meeting on March 19-20. As Fed Chair Jerome Powell noted in a statement to reporters after the FOMC earlier this week: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. We will continue to make our decisions meeting by meeting.” (A transcript of Powell’s press conference can be found here.) Today’s employment report indicates that conditions in the labor market may not be consistent with a further decline in price inflation.

It’s worth keeping several things in mind when interpreting today’s report.

  1. The payroll employment data and the data on average hourly earnings are subject to substantial revisions. This fact was shown in today’s report by the large upward revision in net employment creation in December, as noted earlier in this post.
  2. A related point: The data reported in this post are all seasonally adjusted, which means that the BLS has revised the raw (non-seasonally adjusted) data to take into account normal fluctuations due to seasonal factors. In particular, employment typically increases substantially during November and December in advance of the holiday season and then declines in January. The BLS attempts to take into account this pattern so that it reports data that show changes in employment during these months holding constant the normal seasonal changes. So, for instance, the raw (non-seasonally adjusted) data show a decrease in payroll employment during January of 2,635,000 as opposed to the seasonally adjusted increase of 353,000. Over time, the BLS revises these seasonal adjustment factors, thereby also revising the seasonally adjusted data. In other words, the BLS’s initial estimates of changes in payroll employment for these months at the end of one year and the beginning of the next should be treated with particular caution.
  3. The establishment survey data on average weekly hours worked show a slow decline since November 2023. Typically, a decline in hours worked is an indication of a weakening labor market rather than the strong labor market indicated by the increase in employment. But as the following figure shows, the data on average weekly hours are noisy in that the fluctuations are relatively large, as are the revisons the BLS makes to these data over time.

4. In contrast to today’s jobs report, other labor market data seem to indicate that the demand for labor is slowing. For instance, quit rates—or the number of people voluntarily leaving their jobs as a percentage of the total number of people employed—have been declining. As shown in the following figure, the quit rate peaked at 3.0 percent in November 2021 and March 2022, and has declined to 2.2 percent in December 2023—a rate lower than just before the beginning of the Covid–19 pandemic.

Similarly, as the following figure shows, the number of job openings per unemployed person has declined from a high of 2.0 in March 2022 to 1.4 in December 2023. This value is still somewhat higher than just before the beginning of the Covid–19 pandemic.

To summarize, recent data on conditions in the labor market have been somewhat mixed. The strong increases in net employment and in average hourly earnings in recent months are in contrast with declining average number of hours worked, a declining quit rate, and a falling number of job openings per unemployed person. Taken together, these data make it likely that the FOMC will be in no hurry to cut its target for the federal funds rate. As a result, long-term interest rates are also likely to remain high in the coming months. The following figure from the Wall Street Journal provides a striking illustration of the effect of today’s jobs report on the bond market, as the interest rate on the 10-year Treasury note rose above 4.0 percent for the first time in more than a month. The interest rate on the 10-year Treasury note plays an important role in the financial system, influencing interest rates on mortgages and corporate bonds. 

Has the Federal Reserve Achieved a Soft Landing?

The Federal Reserve building in Washington, DC. (Photo from the New York Times.)

Since inflation began to increase rapidly in the late spring of 2021, the key macroeconomic question has been whether the Fed would be able to achieve a soft landing—pushing inflation back to its 2 percent target without causing a recession. The majority of the members of the Fed’s Federal Open Market Committee (FOMC) believed that increases in inflation during 2021 were largely caused by problems with supply chains resulting from the effects of the Covid–19 pandemic. 

These committee members believed that once supply chains returned to normal, the increase in he inflation rate would prove to have been transitory—meaning that the inflation rate would decline without the need for the FOMC to pursue a contractionary monetary by substantially raising its target range for the federal funds rate. Accordingly, the FOMC left its target range unchanged at 0 to 0.25 percent until March 2022. As the following figure shows, by that time the inflation rate had increased to 6.9 percent, the highest it had been since January 1982. (Note that the figure shows inflation as measured by the percentage change from the same month in the previous year in the personal consumption expenditures (PCE) price index. Inflation as measured by the PCE is the gauge the Fed uses to determine whether it is achieving its goal of 2 percent inflation.)

By the time inflation reached its peak in mid-2022, many economists believed that the FOMC’s decision to delay increasing the federal funds rate until March 2022 had made it unlikely that the Fed could return inflation to 2 percent without causing a recession.  But the latest macroeconomic data indicate that—contrary to that expectation—the Fed does appear to have come very close to achieving a soft landing.  On January 26, the Bureau of Economic Analysis (BEA) released data on the PCE for December 2023. The following figure shows for the period since 2015, inflation as measured by the percentage change in the PCE from the same month in the previous year (the blue line) and as measured by the percentage change in the core PCE, which excludes the prices of food and energy (the red line).  

The figure shows that PCE inflation continued its decline, falling slightly in December to 2.6 percent. Core PCE inflation also declined in December to 2.9 percent from 3.2 percent in November. Note that both measures remained somewhat above the Fed’s inflation target of 2 percent.

If we look at the 1-month inflation rate—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—inflation is closer to Fed’s target, as the following figure shows. The 1-month PCE inflation rate has moved somewhat erratically, but has generally trended down since mid-2022. In December, PCE inflation increased from from –0.8 percent in November (which acutally indicates that deflation occurred that month) to 2.0 percent in December. The 1-month core PCE inflation rate has moved less erratically, also trending down since mid-2022. In December, the 1-month core PCE inflation increased from 0.8 percent in November to 2.1 percent in December. In other words, the December reading on inflation indicates that inflation is very close to the Fed’s target.

The following figure shows for each quarter since the beginning of 2015, the growth rate of real GDP measured as the percentage change from the same quarter in the previous year. The figure indicates that although real GDP growth dropped to below 1 percent in the fourth quarter of 2022, the growth rate rose during each quarter of 2023. The growth rate of 3.1 percent in the fourth quarter of 2023 remained well above the FOMC’s 1.8 percent estimate of long-run economic growth. (The average of the members of the FOMC’s estimates of the long-run growth rate of real GDP can be found here.) To this point, there is no indication from the GDP data that the U.S. economy is in danger of experiencing a recession in the near future.

The labor market also shows few signs of a recession, as indicated by the following figure, which shows the unemployment rate in the months since January 2015. The unemployment rate has remained below 4 percent in each month since December 2021. The unemployment rate was 3.7 percent in December 2023, below the FOMC’s projection of a long-run unemployment rate of 4.1 percent.

The FOMC’s next meeting is on Tuesday and Wednesday of this week (February 1-2). Should we expect that at that meeting Fed Chair Jerome Powell will declare that the Fed has succeeded in achieving a soft landing? That seems unlikely. Powell and the other members of the committee have made clear that they will be cautious in interpreting the most recent macroeconomic data. With the growth rate of real GDP remaining above its long run trend and the unemployment rate remaining below most estimates of the natural rate of unemployment, there is still the potential that aggregate demand will increase at a rate that might cause the inflation rate to once again rise.

In a speech at the Brookings Institution on January 16, Fed Governor Christopher Waller echoed what appear to be the views of most members of the FOMC:

“Time will tell whether inflation can be sustained on its recent path and allow us to conclude that we have achieved the FOMC’s price-stability goal. Time will tell if this can happen while the labor market still performs above expectations. The data we have received the last few months is allowing the Committee to consider cutting the policy rate in 2024. However, concerns about the sustainability of these data trends requires changes in the path of policy to be carefully calibrated and not rushed. In the end, I am feeling more confident that the economy can continue along its current trajectory.”

At his press conference on February 1, following the FOMC meeting, Chair Powell will likely provide more insight into the committee’s current thinking.

Another Middling Inflation Report

Photo courtsey of Lena Buonanno.

On the morning of January 11, 2024, the Bureau of Labor Statistics released its report on changes in consumer prices during December 2023. The report indicated that over the period from December 2022 to December 2023, the Consumer Price Index (CPI) increased by 3.4 percent (often referred to as year-over-year inflation). “Core” CPI, which excludes prices for food and energy, increased by 3.9 percent. The following figure shows the year-over-year inflation rate since Januar 2015, as measured using the CPI and core CPI.

This report was consistent with other recent reports on the CPI and on the personal consumption expenditures (PCE) price index—the measure the Fed uses to gauge whether it is achieving its target of 2 percent annual inflation—in showing that inflation has declined substantially from its peak in mid-2022 but is still above the Fed’s target.

We get a similar result if we look at the 1-month inflation rate—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—as the following figure shows. The 1-month CPI inflation rate has moved erratically but has generally trended down. The 1-month core CPi inflation rate has moved less erratically, making the downward trend since mid-2022 clearer.

The headline on the Wall Street Journal article discussing this BLS report was: “Inflation Edged Up in December After Rapid Cooling Most of 2023.” The headline reflected the reaction of Wall Street investors who had hoped that the report would unambiguously show further slowing in inflation.

Overall, the report was middling: It didn’t show a significant acceleration in inflation at the end of 2023 but neither did it show a signficant slowing of inflation. At its next meeting on January 30-31, the Fed’s Federal Open Market Committee (FOMC) is expected to keep its target for the federal funds rate unchanged. There doesn’t appear to be anything in this inflation report that would be likely to affect the committee’s decision.

Information, Stock Prices, and Boeing

Agents from the National Transportation Safety Board inspect a piece of the Boeing jetliner found in a backyard in Portland, Oregon. (Photo from the AP via the New York Times.)

What causes movements in stock prices? As we explain in Economics and Microeconomics, Chapter 8, Section 8.2 (Macroeconomics, Essentials of Economics, and Money, Banking, and the Financial System, Chapter 6, Section 6.2):  “Shares of stock represent claims on the profits of the firms that issue them. As the fortunes of the firms change and they earn more or less profit, the prices of the stock the firms have issued should also change.” 

We also note that: “Many Wall Street investment professionals expend a great deal of effort gathering all possible information about the future profitability of firms, hoping to buy the stocks that are most likely to rise in the future. As a result of the actions of these professional investors, all of the information about a firm that is available on news and financial websites, cable TV business shows, and online discussion sites like X and Reddit is already reflected in the firm’s stock price.” As a consequence, the price of a firm’s stock will change only as a result of new information about the future profitability of the firm issuing the stock.

During the course of a typical week, the new information that becomes available about a large company, like Apple or General Motors, is likely to indicate only minor changes in the future profitability of the firm. Therefore, we wouldn’t expect that the firm’s stock price would change very much. Sometimes, though, investors receive important new information that causes them to significantly revise their expectations of the future profitability of a firm. That’s what happened to Boeing, the jetliner manufacturer, on Friday, January 5. An Alaska Air Boeing 737 Max 9 was taking off from Portland International Airport when a piece of the plane blew out. (A Wall Street Journal article gives the details of the incident.)

The accident caused some industry observers to question whether Boeing’s quality control during manufacturing had deficiencies that might lead to other problems being discovered on the firm’s jetliners. Boeing was particularly at risk of having its quality control methods questioned because in 2019 two slightly different models of the 737 Max airliner had crashed, causing the planes to be grounded for almost two years.

The effect of the Alaska Air incident on Boeing’s stock price can be seen in the following figure, reproduced from the Wall Street Journal. On Friday, January 5 at 4 pm eastern time—the time at which trading on the New York Stock Exchange (NYSE) closes for the day—the price of Boeing’s stock was $249.00 per share. The accident took place at around 7:40 pm eastern time, so it occurred after the close of trading on the NYSE. When trading on the NYSE resumed at 9:30 am on Monday, January 8, Boeing’s stock price had declined to $227.79 per share. The size of the drop in price indicated that investors believed that the Portland accident would have a significantly negative affect on Boeing’s future profitability. Boeing’s profits could fall if the accident leads airlines to reduce their future purchases of 737 Max airliners or if Boeing’s costs rise significantly as a result of making repairs on Max airliners currently in servide or as a result of having to spend more on quality control measures when manufacturing the planes.

The effect of the Portland accident on Boeing’s stock price is an example of the efficiency of the stock market in processing information about a firm’s future profitability.

Glenn’s Presentation at the ASSA Session on “The U.S. Economy: Growth, Stagnation or Financial Crisis and Recession?”

Glenn participated in this session hosted by the Society of Policy Modeling and the American Economic Association of Economic Educators and moderated by Dominick Salvatore of Fordham University. (Link to the page for this session in the ASSA program.)

Also making presentations at the session were Robert Barro of Harvard University, Janice Eberly of Northwestern University, Kenneth Rogoff of Harvard University, and John Taylor of Stanford University.

Here is the abstract for Glenn’s presentation:

Economic growth is foundational for living standards and as an objective for economic policy. The emergence of Artificial Intelligence as a General Purpose Technology, on the one hand, and a number of demographic and budget challenges, on the other hand, generate an unusually wide range of future economic outcomes. I focus on key ‘policy’ and ‘political economy’ considerations that increase the likelihood of a more favorable growth path given pre-existing trends and technological possibilities. By ‘policy,’ I consider mechanisms enabling growth through research, taxation, the scope of regulation, and competition. By ‘political economy’ factors, I consider mechanisms to increase economic participation in support of growth and policies that enhance it. I argue that both sets of mechanisms are necessary for a viable pro-growth economic policy framework.

These slides from the presentation highlight some of Glenn’s key points. (Note the cover of the new 9th edition of the textbook in slide 7!)

Glenn’s Presentation at the ASSA Session on “Making Economics Relevant: Applications of Economic Principles in the Real World”

Glenn participated in this session hosted by the National Association of Economic Educators and moderated by Kim Holder of the University of West Georgia. Glenn thanks Kim for organizing the session and for inviting him to participate.

Here is the session abstract and the list of participants:

Glenn prepared some slides for his presentation. Note that “B01″ and B02” were the titles when he first taught principles of economics as an assistant professor at Northwestern. (We won’t mention how long ago that was!)

A Mixed Employment Report

Photo courtesy of Lena Buonanno.

During the last few months of 2023, the macroeconomic data has generally been consistent with the Federal Reserve successfully bringing about a soft landing: Inflation returning to the Fed’s 2 percent target without the economy entering a recession. On the morning of Friday, January 5, the Bureau of Labor Statistics (BLS) issued its latest “Employment Situation Report” for December 2023.  The report was generally consistent with the economy still being on course for a soft landing, but because both employment growth and wage growth were stronger than expected, the report makes it somewhat less likely that the Federal Reserve’s Federal Open Market Committee (FOMC) will soon begin reducing its target for the federal funds rate. (The full report can be found here.)

Economists and policymakers—notably including the members of the FOMC—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best gauge of the current state of the labor market.

The report indicated that during December there had been a net increase of 216,000 jobs.  This number was well above the expected gain of 160,000 to 170,000 jobs that several surveys of economists had forecast (see here, here, and here). The BLS revised downward by a total of 71,000 jobs its previous estimates for October and November, somewhat offsetting the surprisingly strong estimated increase in net jobs for December.

The following figure from the report shows the net increase in jobs each month since December 2021. Although the net number of jobs created has trended up from September to December, the longer run trend has been toward slower growth in employment. In the first half of 2023, an average of 257,000 net jobs were created per month, whereas in the second half of 2023, an average of 193,000 net jobs were created per month. Average weekly hours worked have also been slowly trending down, from 34.6 hours per week in January to 34.3 hours per week in December.

Economists surveyed were also expecting that the unemployment rate—calculated by the BLS from data gathered in the household survey—would increase slightly. Instead, it remained constant at 3.7 percent. As the following figure shows, the unemployment rate has been below 4.0 percent each month since December 2021. The members of the FOMC expect that the unemployment rate during 2024 will be 4.1 percent. (The most recent economic projections of the members of the FOMC can be found here.)

Although the employment data indicate that conditions in the labor market are easing in a way that may be consistent with inflation returning to the Fed’s 2 percent target, the data on wage growth are so far sending a different message. Average hourly earnings—data on which are collected in the establishment survey—increased by 4.1 percent in December compared with the same month in 2022. This rate of increase was slightly higher than the 4.0 percent increase in November. The following figure shows movements in the rate of increase in average hourly earnings since January 2021.

In his press conference following the FOMC’s December 13, 2023 meeting, Fed Chair Jerome Powell noted that increases in wages at 4 percent or higher were unlikely to result in inflation declining to the Fed’s 2 percent goal:

“So wages are still running a bit above what would be consistent with 2 percent inflation over a long period of time. They’ve been gradually cooling off. But if wages are running around 4 percent, that’s still a bit above, I would say.”

The FOMC’s next meeting is on January 30-31. At this point it seems likely that the committee will maintain its current target for the federal funds. The data in the latest employment report make it somewhat less likely that the committee will begin reducing its target at its meeting on March 19-20, as some economists and some Wall Street analysts had been expecting. (The calendar of the FOMC’s 2024 meetings can be found here.)

Another Employment Report Consistent with a Soft Landing

Photo courtesy of Lena Buonanno.

In recent months, the macroeconomic data has generally been consistent with the Federal Reserve successfully bringing about a soft landing: Inflation returning to the Fed’s 2 percent target without the economy entering a recession. The Bureau of Labor Statistics’ latest Employment Situation Report, released on the morning of Friday, December 8,  was consistent with this trend. (The full report can be found here.)

Economists and policymakers—notably including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best gauge of the current state of the labor market.

The report indicated that during November there had been a net increase of 199,000 jobs.  This number was somewhat above the expected gain of 153,000 jobs Reuters news service reported from its survey of economists and just slightly above an expected gain of 190,000 jobs the Wall Street Journal reported from a separate survey of economists. The BLS revised downward by 35,000 jobs its previous estimate for September. It left its estimate for October unchanged.  The following figure from the report shows the net increase in jobs each month since November 2021.

Because the BLS often substantially revises its preliminary estimates of employment from the establishment survey, it’s important not to overinterpret data for a single month or even for a few months. But general trends in the data can give useful information on changes in the state of the labor market. The estimate for November is the fourth time in the past six months that employment has increased by less than 200,000. Prior to that, employment had increased by more than 200,000 every month since January 2021.

Although the rate of job increases is slowing, it’s still above the rate at which new entrants enter the labor market, which is estimated to be roughly 90,000 people per month. The additional jobs are being filled in part by increased employment among people aged 25 to 54—so-called prime-age workers. (We discuss the employment-population ratio in Macroeconomics, Chapter 9, Section 9.1, Economics, Chapter 19, Section 9.1, and Essentials of Economics, Chapter 13, Section 13.1.) As the following figure shows, the employment-population ratio for prime-age workers remains above its level in early 2020, just before the spread of the Covid–19 pandemic in the United States.

The estimated unemployment rate, which is collected in the household survey, was down slightly from 3.9 percent to 3.7 percent. A shown in the following figure, the unemployment rate has been below 4 percent every month since February 2022.

The Employment Situation Report also presents data on wages, as measured by average hourly earnings. The growth rate of average hourly earnings, measured as the percentage change from the same month in the previous year, continued its gradual decline, as shown in the following figure. As a result, upward pressure on prices from rising labor costs is easing. (Keep in mind, though, as we note in this blog post, changes in average hourly earnings have shortcomings as a measure of changes in the costs of labor to businesses.)

Taken together, the data in the latest employment report indicate that the labor market is becoming less tight, reflecting a gradual slowing in U.S. economic growth. The data are consistent with the U.S. economy approaching a soft landing. It’s still worth bearing in mind, of course, that, as Fed Chair Jerome Powell continues to caution, there’s no certainty that inflation won’t surge again or that the U.S. economy won’t enter a recession.

Can We Now Rule Out One of the Three Potential Monetary Policy Outcomes?

Federal Reserve Chair Jerome Powell (photo from bloomberg.com)

In a blog post from February of this year, we discussed three possible outcomes of the contractionary monetary policy that the Federal Reserve has been pursuing since March 2022, when the Federal Open Market Committee (FOMC) began raising its target range for the federal funds rate:

  1.  A soft landing. The Fed’s preferred outcome; inflation returns to the Fed’s target of 2 percent without the economy falling into recession.
  2. A hard landing. Inflation returns to the Fed’s 2 percent target, but the economy falls into a recession.
  3. No landing. At the beginning of 2023, the unemployment remained very low and inflation, as measured by the percentage change in the personal consumption expenditures (PCE) price index from the same month in the previous year, was still above 5 percent. So, some observers, particularly in Wall Street financial firms, began discussing the possibility that low unemployment and high inflation might persist indefinitely, resulting an outcome of no landing.

At the end of 2023, the economy appears to be slowing: Retail sales declined in October; real disposable personal income increased in October, but it has been trending down, as have real personal consumption expenditures; while the increase in third quarter real GDP was recently revised upward from 4.9 percent to 5.2 percent, forecasts of growth in real GDP during the fourth quarter show a marked slowing—for instance, GDPNow, compiled by the Atlanta Fed, estimates fourth quarter growth at 2.1 percent; and while employment continues to expand, average weekly hours have been slowly declining and initial claims for unemployment insurance have been increasing.

The slowing in the growth of output, income, and employment are reflected in a falling inflation rate. The following figure show the percentage change since the same month in the previous year in PCE price index, which is the measure the Fed uses to gauge whether it is hitting its 2 percent inflation target. (We discuss the reasons for the Fed preferring the PCE price index to the consumer price index (CPI) in Macroeconomics, Chapter 15, Section 15.5 and Economics, Chapter 25, Section 25.5.) The figure also shows core PCE, which excludes the prices of food and energy. Core PCE inflation typically gives a better measure of the underlying inflation rate than does PCE inflation.

PCE inflation declined from 3.4 percent in September to 3.0 percent in October. Core PCE inlation declined from 3.8 percent in September to 3.5 percent in September. Although inflation has been declining from its peak in mid-2022, both of these measures of inflation remain above the Fed’s 2 percent target.

But if we look at the 1-month inflation rate—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—we see a much sharper decline in inflation, as the following figure shows.

The 1-month inflation rate is naturally more volatile than the 12-month inflation rate. In this case, the 1-month rate shows a sharp decline in PCE inflation from 3.8 percent in September to 0.6 percent in October. Core PCE inflation declined less sharply from 3.9 percent in September to 2.0 percent in October.

The continuing decline in inflation has caused some economists and Wall Street analysts to predict that the FOMC will not implement further increases in its target for the federal funds rate and will likely begin cutting its target by mid-2024.

On December 1 in a speech at Spelman College in Atlanta, Fed Chair Jerome Powell urged caution in assuming that the Fed has succeeded in putting inflation on a course back to its 2 percent target:

“The FOMC is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

In terms of the three policy outcomes listed at the beginning of this post, the third—no landing, with the unemployment rate remaining very low while the inflation rate remains above the Fed’s 2 percent target—now seems unlikely. The labor market appears to be weakening, which will likely result in increases in the unemployment rate. The next “Employment Report” from the Bureau of Labor Statistics, which will be released on December 8, will provide additional data on the state of the labor market.

Although we can’t entirely rule out the possibility of a no landing outcome, it seems more likely that the economy will either make a soft landing—if output and employment continue to increase, although at a slower rate, while inflation continues to decline—or a hard landing—if output and employment begin to fall as the economy enters a recession.  Although a consensus seems to be building among economists, policymakers, and Wall Street analysts that a soft landing is the likeliest outcome, Powell has provided a reminder that that outcome is far from certain.

Fed Governor Christopher Waller Gives an Optimistic Speech

Federal Reserve Governor Christopher J. Waller (photo from the Associated Press via the Wall Street Journal)

Fed Governor Christopher Waller has a reputation for being a policy hawk, which means that since the spring of 2022 he has been a forceful advocate of multiple increases in the target for the federal funds rate as the Fed attempts to slow the economy and bring inflation back to the Fed’s 2 percent target. (Waller’s biography on the Fed’s web site can be found here.)

So, it was notable that in a speech at the American Enterprise Institute (AEI) on November 28, he said that “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.” Although he also stressed that “there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the [Federal Open Market Committee] FOMC has done enough to achieve price stability” his remarks were interpreted as reinforcing the growing view among non-Fed economists and investors that the FOMC is unlikely to increase its target for the federal funds rate further and is likely to reduce the target at some point during 2024. The text of Waller’s speech can be found here.

AEI economist Michael Strain interviewed Waller following his speech. In the interview (which can be found here), Strain made the case for believing that the Fed’s ability to achieve a soft landing—returning inflation to the 2 percent target without pushing the economy into a recession—would be more difficult than Waller seems to believe. Included in the interview are discussions of whether expecting a soft landing is consistent with the historical record, what guidance the Taylor rule can give to monetary policymakers (we discuss the Taylor rule in Macroeconomics, Chapter 15, Section 15.5, Economics, Chapter 25, Section 15.5, and Essentials of Economics, Chapter 17, Section 17.5), the significance of rising labor force participation rates among prime-age workers, and the implications large federal budget deficits have for monetary policy.