MNI INTERVIEW: Fed Highlights Risk of Weakening Job Market

The Federal Reserve judges the danger of deterioration in the U.S. labor market as now roughly similar to that of inflation reaccelerating, an indication that policy is at the right setting, former Fed Board research director David Wilcox told MNI.

Fed Chair Jerome Powell's notable new comment last week that an "unexpected weakening" in the labor market could bring forward rate cuts is less indicative of the Fed's knowing something we don't know and more a statement on equally balanced risks, Wilcox said in an interview.

The Fed has held the fed funds rate at the current 23-year high of 5.25%-5.5% since July without knowing whether that's likely to be the peak for the cycle. “They’re now more convinced than before that policy is roughly where it needs to be, and it’s clear the risk of the next move being up has receded some," Wilcox said.

Powell's noting that policy could be too tight as much as too loose points to a careful consideration of easing too soon versus too late, he said. "There's risk on both sides."

COORDINATED SOFTENING

The Fed chair was quick to add the labor market is in good shape and that he sees no signs of concern at present that would warrant a policy response.

It would likely be an abrupt shift that sees substantial upward move in the unemployment rate, marked weakening in payrolls growth, increase in initial claims and decline in quits rates that would constitute the kind of unexpected weakening to which Powell is referring, Wilcox said. (See MNI INTERVIEW: Fed Will Bide Its Time On Rate Cuts-Lockhart)

"He’s referring to a coordinated softening across many different indicators," he said. "It's a well-documented phenomenon that when the U.S. economy weakens materially, it doesn’t tend to do it gradually. It tends to do it abruptly."

"When the labor market falls apart, it tends not to be subtle," he said.

CRACKS APPEARING

The FOMC upgraded its assessment of the labor market at the March meeting, now expecting the jobless rate to end the year a tenth better at 4.0%, little changed from the latest Labor Department reading. But the labor market is clearly losing momentum, as should be expected, Wilcox said.

A UBS analysis this month noted regional data show jobless rates in nearly half of U.S. states have triggered the “Sahm Rule” that helps identify the beginning of a recession.

"It was inevitable we would see some ragged edges here and there, and for the most part that’s what we have seen," Wilcox said. "The labor market was overheated and continuing to charge ahead at a faster than sustainable pace. There needed to be some reduction in labor market indicators, and maybe a little further slowing might still be required."

The recent surge in immigration has been the wild card that's allowed job creation at a more rapid pace than previously believed to be sustainable, Wilcox said. With supply and demand in better balance and the unemployment rate set to tick up, the outlook becomes more delicate.

"We know there is some fragility in the U.S. economy when it’s not moving forward at a rapid pace," he said. "It doesn’t take much to knock the economy off-kilter and set off recessionary dynamics. I haven’t seen evidence that persuades me that’s in process now, but we’re at heightened risk."