Image of “a small business with a help wanted sign in the window” generated by ChatGTP 4o.
This morning (June 4), the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for April 2024. The report proivided more data indicating that the U.S. labor market is continuing its return to pre-pandemic conditions. The following figure shows that, at 4.8 percent, the rate of job openings has continued its slow decline from the rate of 7.4 percent in March 2022. The rate in April was the same as the rate in January 2019, although it was till above the rates during most of 2019 and early 2020, as well as the rates during most of the period following the Great Recession of 2007–2009.
The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days. The rate of job openings is the number of job openings divided by the number of job openings plus the number of employed workers, multiplied by 100.
In the following figure, we compare the total number of job openings to the total number of people unemployed. The figure shows a slow decline from a peak of more than 2 job openings per unemployed person in the spring of 2022 to 1.2 job openings per employed person in April 2024—about the same as in 2019 and early 2020, before the pandemic. Note that the number is still above 1.0, indicating that the demand for labor is still high, although no higher than during the strong labor market of 2019.
The rate at which workers are willing to quit their jobs is an indication of how they perceive the ease of finding a new job. As the following figure shows, the quit rate declined slowly from a peak of 3 percent in late 2021 and early 2022 to 2.2 percent in November 2023, where it has remained through April of 2024. That rate is slightly below the rate during 2019 and early 2020. By this measure, workers perceptions of the state of the labor market seem largely unchanged in recent months.
The JOLTS data indicate that the labor market is about as strong as it was in the months priod to the start of the pandemic, but it’s not as historically tight as it was through most of 2022 and 2023.
On Friday morning, the BLS will release its “Employment Situation” report for May, which will provide additional data on the state of the labor market. (Note that the data in the JOLTS report lag the data in the “Employment Situation” report by one month.)
Image of “someone in Zimbabwe holding the new ZiG currency” generated by ChatGPT 4o.
The classical gold standard lasted from 1880 until the outbreak of World War I in 1914 disrupted the global financial system. Under the gold standard, countries stood ready to redeem their paper currencies in gold and many business contracts contained “gold clauses” that allowed the receiver of funds to insist on being paid in gold. The countries shaded in yellow in the following figure were on the gold standard at the beginning of 1914.
After World War I, the United States remained on the gold standard but the very high inflation rates during and immediately after the war made it difficult for most European countries to resume redeeming their domestic currencies in gold. The United Kingdom didn’t return to the gold standard until 1925—seven years after the end of the war—at which time several other countries participated with the United Kingdom and the United States in what was called the gold exchange standard. In this system, countries fixed their exchange rates against the U.S. dollar and the British pound and held their international reserves in either pounds or dollars. By fixing the value of their currencies against the dollar and the pound—which were both convertible into gold—the currencies effectively fixed the value of their currencies against gold. The gold exhange standard ended in 1931 when, as the result of financial problems caused by the Great Depression, the United Kingdom stopped the convertibility of pounds into gold. The United States stopped the convertiblity of dollars into gold in 1933. (We discuss the gold standard in the online appendix to Macroeconomics, Chapter 18 and Economics, Chapter 28, and in Money, Banking, and the Financial System, Chapter 16, Section 16.4).
In 1944, near the end of World War II, several countries meeting at Bretton Woods New Hampshire agreed to fix the exchange rates between their currencies. Under the Bretton Woods system, the United States agreed to convert U.S. dollars into gold at a price of $35 per ounce—but only in dealing with foreign central banks. U.S. citizens continued to be prohibited from redeeming dollars for gold. The central banks of all other members of the system pledged to buy and sell their currencies at fixed rates against the dollar but not to exchange their currencies for gold either domestically or internationally. As can be seen, the Bretton Woods system was not actually a gold standard because no members of the system allowed their currencies to be freely convertible into gold. The difficulty of keeping exchange rates fixed over long periods led to the collapse of the Bretton Woods system in 1971. (We discuss the Bretton Woods system in the places referenced at the end of the last paragraph.)
Although over the decades there have been various proposals to return to the gold standard, it seems unlikely that the United States or other high-income countries will ever do so. Current day advocates of returning to the gold standard often mention the check the gold standard can place on inflation because the size of a country’s money supply is limited by the country’s gold reserves. In the United States and most other high-income countries the central bank attempts to regulate the inflation rate by controlling short-term interest rates. In lower-income countries, central banks are often not able to act independently of the government. That has been the situation in the African country of Zimbabwe, which has frequently experienced hyperinflation—that is, rates of inflation exceeding 50 percent per month. The inflation rate in 2008 reached a staggering 15 billion percent. As a result, most people in Zimbabwe lost faith in Zimbabwean currency and instead used U.S. dollars for most buying and selling.
That most of the currency in circulation in Zimbabwe is U.S. dollars causes two problems: 1) The supply of available U.S. dollars is limited—so much so that some businesses carefully wash dollars to try to prolong their usability; and 2) few U.S. coins are available, making it difficult for businesses to make change for purchases that aren’t priced in even dollar amounts. Some businesses give customers change in the form of candy or other small food items. The government has made several attempts to resume printing Zimbawean dollars but has had trouble getting consumers and businesses to accept them.
In late April, the Zimbabwean tried a different approach, introducing a new currency, the ZiG, which is short for Zimbabwe Gold. The new paper currency is “backed” by the government’s gold supply, which has a value of about $185 million U.S. dollars. We put the word “backed” in quotation marks because the government isn’t backing the ZiG in the way that governments backed their currency during the period of the classical gold standard. Under the gold standard, paper currency was freely convertible into gold, so anyone wishing to exchange currency for gold was able to do so. The ZiG isn’t convertible into gold. The government is backing the currency with gold only in the sense that it pledges not to issue more currency than it has gold. In other words, the government is essentially promising to put a limit on the total value of the ZiG currency it will issue. Zimbabwean governments have made similar promises in the past that they have ended up breaking.
In its first weeks, the ZiG was having trouble finding acceptance among consumers and businesses, despite efforts by the government to require most businesses to accept it. An article in the Financial Times quoted the owner of a grocery store in the capital of Harare as stating that he won’t accept the ZiG because “My business is alive because I stick to the US dollar.” Similarly, the web site of the BBC quoted the owner of a market stall as saying that “Everything, absolutely everything, is still in US dollars.”
As we discuss in Macroeconomics, Chapter 24, the key to the acceptance of any paper currency is that households and firms have confidence that if they accept the paper currency in exchange for goods and services, the currency will not lose much value during the time they hold it. Without this confidence, currency can’t fulfill the key function of serving as a medium of exchange. In Zimbabwe, as a post on the web site of the World Economic Forum puts it: “It remains to be seen whether the new ZiG can gain the confidence of the public and become a stable local currency, which would allow officials to regain control over monetary policy.”
Supports: Macroeconomics, Chapter 15,Economics, Chapter 25, Essentials of Economics, Chapter 17, and Money, Banking, and the Financial System, Chapter 15.
Image generated by ChatGTP-4o.
In a book review in the Wall Street Journal, the financial writer James Grant referred to “the Federal Reserve’s goal to cheapen the dollar by 2% a year.”
Briefly explain what “cheapen the dollar” means.
Briefly explain what Grant means by writing that the Fed has a “goal to cheapen the dollar by 2% a year.”
Do you agree with Grant that the Fed has this goal? Briefly explain.
Solving the Problem Step 1: Review the chapter material. This problem is about the economic effects of the Federal Reserve’s policy goal of a 2 percent annual inflation rate, so you may want to review Chapter 15, Section 15.5, “A Closer Look at the Fed’s Setting Monetary Policy Targets.”
Step 2: Answer part a. by explaining what “cheapen the dollar” means. Judging from the context, “cheapen the dollar” means to reduce the purchasing power of a dollar. Whenever inflation occurs, the amount of goods and services a dollar can purchase declines. If the inflation rate in a year is 10 percent, than at the end of the year $1,000 can buy 10 percent fewer goods and services than it could at the beginning of the year.
Step 3: Answer part b. by expalining what Grant means by the Fed having a goal of cheapening the dollar by 2 percent a year. Congress has given a dual mandate of high employment and price stability. Since 2012, the Fed has interpreted a 2 percent annual inflation rate as meeting its mandate for price stability. So, Grant means that the Fed’s 2 percent annual inflation goal in effect is also a goal to cheapen—or reduce the purchasing power of the dollar—by 2 percent a year.
Step 4: Answer part c. by explaining whether you agree with Grant that the Fed has a goal of cheapening the dollar by 2 percent a year. As explained in the answer to part b., there is a sense in which Grant is correct; the Fed’s goal of a 2 percent inflation rate is a goal of allowing the purchasing power of the dollar to decline by 2 percent a year. One complication, however, is that most economists believe that changes in price indexes such as the consumer price index (CPI) and the personal consumption expenditures (PCE) price index overstate the actual amount of inflation occurring in the economy. As we discuss in Macroeconomics, Chapter 9, Section 9.4 (Economics, Chapter 19, Section 19.4, and Essentials of Economics, Chapter 13, Section 13.4), there are several biases that cause price indexes to overstate the true inflation rate; the most important of the biases is the failure of price indexes to take fully into account improvements over time in the quality of many goods and services. If increases in price indexes are overstating the inflation rate by one percentage point, then the Fed’s goal of a 2 percent inflation rate results in the dollar losing 1 percent—rather than 2 percent—of its purchasing power over time, corrected for changes in quality.
A meeting of the Federal Open Market Committee (Photo from federalreserve.gov)
On Friday, May 31, the Bureau of Eeconomic Analysis (BEA) released its “Personal Income and Outlays” report for April, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.
The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the change in the PCE from the same month in the previous year. Measured this way, PCE inflation in April was 2.7 percent, which was unchanged since March. Core PCE inflation was also unchanged in April at 2.8 percent. (Note that carried to two digits past the decimal place, both measures decreased slightly in April.)
The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation declined from 4.1 percent in March to 3.1 percent in April. Core PCE inflation declined from 4.1 percent in March to 3.0 percent in April. This decline may indicate that inflation is slowing, but data for a single month should be interpreted with caution and, even with this decline, inflation is still above the Fed’s 2 percent target.
The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell has said that he is particularly concerned by elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.
Inflation using the trimmed mean measure was 2.9 percent in April, down from 3.0 percent in March. Inflation in services remained high, although it declined slightly from 4.0 percent in March to 3.9 percent in April.
It seems unlikely that this month’s PCE data will have much effect on when the members of the Fed’s policy-making Federal Open Market Committee (FOMC) will decide to lower the target for the federal funds rate. The next meeting of the FOMC is June 11-12. That meeting is one of the four during the year at which the committee publishes a Summary of Economic Projections (SEP). The SEP should provide greater insight into what committee members expect will happen with inflation during the remained of the year and whether it’s likely that the committee will lower its target for the federal funds rate this year.
Inflation was running higher than expected during the first three months of 2024, indicating that the trend in late 2023 of declining inflation had been interrupted. At the beginning of the year, many economists and analysts had expected that the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) would begin cutting its target for the federal funds rate sometime in the middle of the year. But with inflation persisting above the Fed’s 2 percent inflation target, it has become likely that the FOMC will wait until later in the year to start cutting its target and might decide to leave the target unchanged through the remainder of 2024.
Accordingly, economists and policymakers were intently awaiting the report from the Bureau of Labor Statistics (BLS) on the consumer price index (CPI) for April. The report released this morning showed a slight decrease in inflation, although the inflation rate remains well above the Fed’s 2 percent target. (Note that, as we discuss in Macroeconomics, Chapter 15, Section 15.5 (Economics, Chapter 25, Section 25.5), the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI in evaluating whether it is hitting its 2 percent inflation target.)
The inflation rate for April measured by the percentage change in the CPI from the same month in the previous month—headline inflation—was 3.4 percent—about the same as economists had expected—down from 3.5 percent in March. As the following figure shows, core inflation—which excludes the prices of food and energy—was 3.6 percent in April, down from 3.8 percent in March.
If we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—the declines in the inflation rate are larger. Headline inflation declined from 4.6 percent in March to 3.8 percent in April. Core inflation declined from 4.4 percent in March to 3.6 percent in April. Note that the value for core inflation is the same whether we measure over 12 months or over 1 month. Overall, we can say that inflation seems to have cooled in April, but it still remains well above the Fed’s 2 percent target.
As has been true in recent months, the path of inflation in the prices of services has been concerning. As we’ve noted in earlier posts, Federal Reserve Chair Jerome Powell has emphasized that as supply chain problems have gradually been resolved, inflation in the prices of goods has been rapidly declining. But inflaion in services hasn’t declined nearly as much. Powell has been particularly concernd about how slowly the price of housing has been declining, a point he made again in the press conference that followed the most recent FOMC meeting.
The following figure shows the 1-month inflation rate in service prices and in service prices not included including housing rent. The figure shows that inflation in all service prices has been above 4 percent in every month since July 2023, but inflation in service prices slowed markedly from 6.6 percent in March to 4.4 percent in April. Inflation in service prices not including housing rent declined more than 50 percent, from 8.9 percent in March to 3.4 percent in April. But, again, even though inflation in service prices declined in April, as the figure shows, the 1-month inflation in services is volatile and even these smaller increases aren’t yet consistent with the Fed meeting its 2 percent inflation target.
Finally, in order to get a better estimate of the underlying trend in inflation, some economists look at median inflation, which is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. As the following figure shows, at 4.3 percent, median inflation in April was unchanged from its value in March.
Today’s report was good news for the Fed in its attempts to reduce the inflation rate to its 2 percent target without pushing the U.S. economy into a recession. But Fed Chair Jerome Powell and other members of the FOMC have made clear that they are unlikely to begin cutting the target for the federal funds rate until they receive several months worth of data indicating that inflation has clearly resumed the downward path it was on during the last months of 2023. The unexpectedly high inflation data for the first three months of 2024 has clearly had a significant effect on Fed policy. Powell was quoted yesterday as noting that: “We did not expect this to be a smooth road, but these [inflation readings] were higher than I think anybody expected,”
Dylan’s Candy Bar in New York City (Photo from the New York Times)
Can prices of one type of good track inflation accurately? As we’ve discussed in a number of blog posts (for instance, here, here, and here), there is a debate among economists about which of the data series on the price level does the best job of tracking the underlying rate of inflation.
The most familiar data series on the price level is the consumer price index (CPI). Core CPI excludes the—typically volatile—food and energy prices. In gauging whether it is achieving its goal of 2 percent annual inflation, the Federal Reserve uses the personal consumption expenditures (PCE) price index. The PCE price index includes the prices of all the goods and services included in the consumption category of GDP, which makes it a broader measure of inflation than the CPI. To understand the underlying rate of inflation, the Fed often focuses on movements in core PCE.
With the increase in inflation that started in the spring of 2021, some economists noted that the prices of particular goods and services—such as new and used cars and housing—were increasing much more rapidly than other prices. So some economists concentrated on calculating inflation rates that excluded these or other prices from either the CPI or the PCE.
For example, the following figure shows the inflation rate measured by the percentage change from the same month in the previous year using the median CPI and using the trimmed mean PCE. If we list the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. The trimmed mean measure of PCE inflation is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. During the period when the inflation rate was increasing rapidly during 2021 and 2022, CPI inflation increased more and was more volatile than PCE inflation. That difference between movements in the two price level series is heightened when comparing median inflation in the CPI with trimmed mean inflation in the PCE. In particular, using trimmed mean PCE, the inflation of late 2021 and 2022 seems significantly milder than it does using median CPI.
The United States last experienced high inflation rates in the 1970s, when few people used personal computers and easily downloading macroeconomic data from the internet wasn’t yet possible. Today, it’s comparatively easy to download data on the CPI and PCE and manipulate them to investigate how the inflation rate would be affected by dropping the prices of various goods and services. It’s not clear, though, that this approach is always helpful in determining the underlying inflation rate. In a market system, the prices of many goods and services will be affected in a given month by shifts in demand and supply that aren’t related to general macroeconomic conditions.
In a recent blog post, economists B. Ravikumar and Amy Smaldone of the Federal Reserve Bank of St. Louis note that there is a strong correlation between movements in the prices of the “Sugar and Sweets” component of the CPI and movements in the overall CPI. Their post includes the following two figures. The first shows the price level since 1947 calculated using the prices of all the goods and services in the CPI (blue line) and the price level calculated just using the prices of goods included in the “Sugar and Sweets” category (red line). The data are adjusted to an index where the value for each series in January 1990 equals 100. The second figure shows the percentage change from the previous month for both series for the months since January 2000.
The two figures show an interesting—and perhaps surprising—correlation between sugar and sweets prices and all prices included in the CPI. The St. Louis Fed economists note that although the CPI is only published once per month, prices on sugar and sweets are available weekly. Does that mean that we could use prices on sugar and sweets to predict the CPI? That seems unlikely. First, consider that the sugar and sweets category of the CPI consists of three sub-categories:
White, brown, and raw sugar and natural and artificial sweetners
Chocolate and other types of candy, fruit flavored rolls, chewing gum and breath mints
Other sweets, including jelly and jams, honey, pancake syrup, marshmallows, and chocolate syrup
Taken together these products are less than 3 percent of the products included in the CPI. In addition, the prices of the goods in this category can be heavily dependent on movements in sugar and cocoa prices, which are determined in world wide markets. For instance, the following figure shows the world price of raw cocoa, which soared in 2024 due to bad weather in West Africa, where most cocoa is grown. There’s no particular reason to think that factors affecting the markets for sugar and cocoa will also affect the markets in the United States for automobiles, gasoline, furniture, or most other products.
In fact, as the first figure below shows, if we look at the inflation rate calculated as the percentage change from the same month in the previous year, movements in sugar and sweets prices don’t track very closely movements in the overall CPI. Beginning in the summer of 2022—an important period when the inflation that began in the spring of 2021 peaked—inflation in sugar and sweets was much higher than overall CPI inflation. Anyone using prices of sugar and sweets to forecast what was happening to overal CPI inflation would have made very poor predictions. We get the same conclusion from comparing inflation calculated by compounding the current month’s rate over an entire year: Inflation in sugar and sweets prices is much more volatile than is overall CPI inflation. That conclusion is unsurprising given that food prices are generally more volatile than are the prices of most other goods.
It can be interesting to experiment with excluding various prices from the CPI or the PCE or with focusing on subcategories of these series. But it’s not clear at this point whether any of these adjustments to the CPI and the PCE, apart from excluding all food and energy prices, gives an improved estimate of the underlying rate of inflation.
This morning (May 3), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report for April. The report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)
According to the establishment survey, there was a net increase of 175,000 jobs during April. This increase was well below the increase of 240,000 that economists had forecast in a survey by the Wall Street Journal and well below the net increase of 315,000 during March. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past to years.
As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs in the establishment survey. The net increase in jobs as measured by the household survey fell from 498,000 in March to 25,000 in April.
The unemployment rate, which is also reported in the household survey, ticked up slightly from 3.8 percent to 3.9 percent. It has been below 4 percent every month since February 2022.
The establishment survey also includes data on average hourly earnings (AHE). As we note in this recent post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure show the percentage change in the AHE from the same month in the previous year. The 3.9 percent value for April continues a downward trend that began in February.
The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic.
The 1-month rate of wage inflation of 2.4 percent in April is a significant decrease from the 4.2 percent rate in March, although it’s unclear whether the decline was a sign that the labor market is weakening or reflected the greater volatility in wage inflation when calculated this way.
The macrodata released during the first three months of the year had, by and large, indicated strong economic growth, with the pace of employment increases being particularly rapid. Wages were also increasing at a pace above that during the pre-Covid period. Inflation appeared to be stuck in the range of 3 percent to 3.5 percent, above the Fed’s target inflation rate of 2 percent.
Today’s “Employment Situation” report may be a first indication that growth is slowing sufficiently to allow the inflation rate to fall back to 2 percent. This is the outcome that Fed Chair Jerome Powell indicated in his press conference on Wednesday that he expected to occur at some point during 2024. Financial markets reacted favorably to the release of the report with stock prices jumping and the interest rate on the 10-year Treasury note falling. Many economists and Wall Street analysts had concluded that the Fed’s policy-making Federal Open Market Committee (FOMC) was likely to keep its target for the federal funds rate unchanged until late in the year and might not institute a cut in the target at all this year. Today’s report caused some Wall Street analysts to conclude, as the headline of an article in the Wall Street Journal put it, “Jobs Data Boost Hopes of a Late-Summer Rate Cut.”
This reaction may be premature. Data on employment from the establishment survey can be subject to very large revisions, which reinforces the general caution against putting too great a weight one month’s data. Its most likely that the FOMC would need to see several months of data indicating a slowing in economic growth and in the inflation rate before reconsidering whether to cut the target for the federal funds rate earlier than had been expected.
Chair Jerome Powell at a meeting of the Federal Open Market Committee (photo from federalreserve.gov)
At the beginning of the year, there was an expectation among some economists and policymakers that the Fed’s policy-making Federal Open Market Committee (FOMC) would begin cutting its target range for the federal funds rate at the meeting that ended today (May 1). The Fed appeared to be bringing the U.S. economy in for a soft landing—inflation returning to the Fed’s 2 percent target without a recession occurring.
During the first quarter of 2024, production and employment have been expanding more rapidly than had been expected and inflation has been higher than expected. As a result, the nearly universal expectation prior to this meeting was that the FOMC would leave its target for the federal funds rate unchanged. Some economists and investment analysts have begun discussing the possiblity that the committee might not cut its target at all during 2024. The view that interest rates will be higher for longer than had been expected at the beginning of the year has contributed to increases in long-term interest rates, including the interest rates on the 10-year Treasury Note and on residential mortgage loans.
The statement that the FOMC issued after the meeting confirmed the consensus view:
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”
In his press conference after the meeting, Fed Chair Jerome Powell emphasized that the FOMC was unlikely to cut its target for the federal funds rate until data indicated that the inflation rate had resumed falling towards the Fed’s 2 percent target. At one point in the press conference Powell noted that although it was taking longer than expected for the inflation rate to decline he still expected that the pace of economic actitivity was likely to slow sufficiently to allow the decline to take place. He indicated that—contrary to what some economists and investment analysts had suggested—it was unlikely that the FOMC would raise its target for the federal funds rate at a future meeting. He noted that the possibility of raising the target was not discussed at this meeting.
Was there any news in the FOMC statement or in Powell’s remarks at the press conference? One way to judge whether the outcome of an FOMC meeting is consistent with the expectations of investors in financial markets prior to the meeting is to look at movements in stock prices during the time between the release of the FOMC statement at 2 pm and the conclusion of Powell’s press conference at about 3:15 pm. The following figure from the Wall Street Journal, shows movements in the three most widely followed stock indexes—the Dow Jones Industrial Average, the S&P 500, and the Nasdaq composite. (We discuss movements in stock market indexes in Macroeconomics and Essentials of Economics, Chapter 6, Section 6.2 and in Economics, Chapter 8, Section 8.2.)
If either the FOMC statement or the Powell’s remarks during his press conference had raised the possibility that the committee was considering raising its target for the federal funds rate, stock prices would likely have declined. The decline would reflect investors’ concern that higher interest rates would slow the economy, reducing future corporate profits. If, on the other hand, the statement and Powell’s remarks indicated that the committee would likely cut its target for the federal funds rate relatively soon, stock prices would likely have risen. The figure shows that stock prices began to rise after the 2 pm release of the FOMC statement. Prices rose further as Powell seemed to rule out an increase in the target at a future meeting and expressed confidence that inflation would resume declining toward the 2 percent target. But, as often happens in the market, this sentiment reversed towards the end of Powell’s press conference and two of the three stock indexes ended up lower at the close of trading at 4 pm. Presumably, investors decided that on reflection there was no news in the statement or press conference that would change the consensus on when the FOMC might begin lowering its target for the federal funds rate.
The next signficant release of macroeconomic data will come on Friday when the Bureau of Labor Statistics issues its employment report for April.
The latest significant piece of macroeconomic data that will be available to the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) before it concludes its meeting tomorrow is the report on the Employment Cost Index (ECI), released this morning by the Bureau of Labor Statistics (BLS). As we’ve noted in earlier posts, as a measure of the rate of increase in labor costs, the FOMC prefers the ECI to average hourly earnings (AHE) .
The AHE is calculated by adding all of the wages and salaries workers are paid—including overtime and bonus pay—and dividing by the total number of hours worked. As a measure of how wages are increasing or decreasing during a particular period, AHE can suffer from composition effects because AHE data aren’t adjusted for changes in the mix of occupations workers are employed in. For example, during a period in which there is a decline in the number of people working in occupations with higher-than-average wages, perhaps because of a downturn in some technology industries, AHE may show wages falling even though the wages of workers who are still employed have risen. In contrast, the ECI holds constant the mix of occupations in which people are employed. The ECI does have the drawback, that it is only available quarterly whereas the AHE is available monthly.
The data released this morning indicate that labor costs continue to increase at a rate that is higher than the rate that is likely needed for the Fed to hit its 2 percent price inflation target. The following figure shows the percentage change in the employment cost index for all civilian workers from the same quarter in 2023. The blue line looks only at wages and salaries while the red line is for total compensation, including non-wage benefits like employer contributions to health insurance. The rate of increase in the wage and salary measure decreased slightly from 4.4 percent in the fourth quarter of 2023 to 4.3 percent in the first quarter of 2024. The rate of increase in compensation was unchanged at 4.2 percent in both quarters.
If we look at the compound annual growth rate of the ECI—the annual rate of increase assuming that the rate of growth in the quarter continued for an entire year—we find that the rate of increase in wages and salaries increased from 4.3 percent in the fourth quarter of 2023 to 4.5 percent in the first quarter of 2024. Similarly, the rate of increase in compensation increased from 3.8 percent in the third quarter of 2023 to 4.5 percent in the first quarter of 2024.
Some economists and policymakers prefer to look at the rate of increase in ECI for private industry workers rather than for all civilian workers because the wages of government workers are less likely to respond to inflationary pressure in the labor market. The first of the following figures shows the rate of increase of wages and salaries and in total compensation for private industry workers measured as the percentage increase from the same quarter in the previous year. The second figure shows the rate of increase calculated as a compound growth rate.
The first figure shows a slight decrease in the rate of growth of labor costs from the fourth quarter of 2023 to the first quarter of 2024, while the second figure shows a fairly sharp increase in the rate of growth.
Taken together, these four figures indicate that there is little sign that the rate of increase in employment costs is falling to a level consistent with a 2 percent inflation rate. At his press conference tomorrow afternoon, following the conclusion of the FOMC’s meeting, Fed Chair Jerome Powell will give his thoughts on the implications for future monetary policy 0f recent macroeconomic data.
Supports:Macroeconomics, Chapter 18, Economics, Chapter 28, and Essentials of Economics, Chapter 19.
In a recent post, economics blogger Noah Smith discussed the effects on the Japanese economy of a “weaker yen”: “A weaker yen is making Japanese people feel suddenly poorer ….” But “let’s remember that a ‘weaker’ exchange rate isn’t always a bad thing.”
When the yen becomes weaker, does one yen exchange for more or fewer U.S. dollars?
Why might a weaker yen make Japanese people feel poorer?
Are there any ways that a weaker yen might help the Japanese economy? Briefly explain.
Considering your answers to parts b. and c., can you determine whether a weak yen is good or bad for the Japanese economy? Briefly explain.
Solving the Problem
Step 1:Review the chapter material. This problem is about the effect of changes in a country’s exchange rate on the country’s economy, so you may want to review Macroeconomics, Chapter 18, Section 18.2, “The Foreign Exchange Market and Exchange Rates,” (Economics, Chapter 28, Section 18.2, and Essentials of Economics, Chapter 19, Section 19.6.
Step 2:Answer part a. by explaining what a “weaker” yen means. A weaker yen will exchange for fewer U.S. dollars (or other currencies), or, equivalently, more yen will be required in exchange for a U.S. dollar. (This situation is illustrated in the figure at the top of this post, which shows the substantial weakening of yen against the dollar in the period since the end of the 2020 recession.)
Step 3: Answer part b. by explaining why a weaker yen might make people in Japan feel poorer. A weaker yen raises the yen price of imported goods. For example at an exchange rate of ¥100 = $1, a $1 Hershey candy bar imported from the United States will sell in Japan for ¥100. But if the yen becomes weaker and the exchange rate moves to ¥120 = $1, then the imported candy bar will have increased in price to ¥120. (Note that this discussion is simplified because a change in the exchange rate won’t necessarily be fully passed through to the prices of imported goods, particularly in the short run. But we would still expect that a weaker yen will result in higher yen prices of imports.) A weaker yen will require people in Japan to pay more for imports, leaving them with less to spend on other goods. Because they will be able to consume less, people in Japan will feel poorer. (As we note in Section 18.3, many goods traded internally are priced in U.S. dollars—oil being an important example. Because Japan imports nearly all of its oil and more than half of its food, a decline in the value of the yen in exchange for the dollar will increase the yen price of key consumer goods.)
Step 4: Answer part c. by explaining how a weaker yen might help the Japanese economy. A weaker yen increases the yen price of Japanese imports but it also decreases the foreign currency price of Japanese exports. This effect would be the main way in which a weaker yen might help the Japanese economy but we can also note that Japanese businesses that compete with foreign imports will also be helped by the increase in import prices.
Step 5: Answer part d. by explaining that a weaker yen isn’t all bad or all good for the Japanese economy. As the answers to parts b. and c. indicate, a weaker yen creates both winners and losers in the Japanese economy. Japanese consumers lose as a result of a weaker yen but Japanese firms that export or that compete against foreign imports will be helped.
