Last week, the April inflation numbers came in a little bit high. At the time, I (and several other analysts) pointed out that the higher number was almost all due to a long coming recovery in fuel prices, and that even with that higher number, inflation was nowhere near being a real issue.
However, the Fed members went running to just about any media outlet that would listen telling everyone that those shaky numbers were the reason the Fed was very likely to raise interest rates in June. I wrote at the time, that it seems like this Federal Reserve is more interested in showing that they are inflation hawks than they are interested in following the actual data.
The Federal Reserve has two official mandates, to keep inflation in check, and to keep employment as close to full employment as possible. This begs the question of why, exactly, the Fed seems so keen on raising rates right away. Employment is doing better, but nowhere near full, and wage growth is stagnant, so no issues there. The twelve month inflation rate, even with April’s increase, is just 1.1 percent, well short of the Fed’s supposed 2.0 percent inflation target.
A Funny Thing Happened On the Way To the Rate Hike
Unfortunately for the Fed’s plan to get a gold star for raising interest rates, the May jobs report came out. While the Fed may have gotten one, tenuous, report that inflation might kind of, sort of, be rising, a little bit, the May employment numbers are a sledgehammer obvious, no questions asked, kind of data showing that the employment market is actually very weak.
The May report showed just 38,000 new jobs created. The forecast was for 155,000. To say that the report was unexpectedly weak is an understatement. Fed Governor Lael Brainard ran out first thing and said that the Fed should “wait” for more data before raising rates. – Good call.
So, the June rate hike that everyone was super serious about, is now, off the table completely.
That is all well and good, but the scary part right now, is what would have happened if this jobs data came in just a little stronger and the Fed shoved through its July right hike into the teeth of a job market that just isn’t that strong right now? Why is the Fed being extra cautious about inflation, but showing now such caution for the job market.
The Fed’s dual mission is both full employment and keeping inflation in check, but the Fed seems much more interested in fighting phantom inflation than it does in economic growth. Without a well timed Chinese market crash earlier this year, the Fed may have raised rates in the first quarter derailing what is turning out to be a week employment situation, and that was without a rate hike.
While investors are right to fear inflation, the data just don’t suggest that it is remotely an issue at this time, while jobs and economic growth really are issues.
It begs the question, is the Fed looking at the right things, or has it developed so much tunnel vision to looking tough on inflation that it has taken its eye off all the other proverbial economic balls?