MNI INTERVIEW: Resilient Jobs Mean Fed Can Tighten More-Kamin

The Federal Reserve can tighten monetary policy further after employment figures Friday showed decent job growth and strong wage gains, ex-Fed board economist Steven Kamin told MNI.

“It’s consistent with the Fed following through on its plans to raise interest rates further,” as outlined in its last Summary of Economic Projections, said Kamin. He spent 32 years at the Federal Reserve’s Board of Governors and was director of the Division of International Finance. “I’m happy to go with the SEP on this, so two more hikes.”

U.S. employers added 209,000 jobs in June, lower than analysts expected and the weakest reading since December of 2020, as the unemployment rate eased to 3.6% and wage growth picked up, an outcome Kamin described as a "mixed bag."

Minutes from the Fed’s June meeting this week revealed some officials had reservations about the decision to pause, and almost all expect rates to move higher this year. The Fed held rates steady at 5-5.25% but FOMC members raised their median expectation in the SEP to 5.6% by year end.

Kamin, now a senior fellow at the American Enterprise Institute, says how long the Fed holds rates at their peak is more important than how high borrowing costs get, even if the latter is a keen interest of markets.

“That’s a little bit more consequential because I think despite the huge increase in interest rates from right after the pandemic to now, markets have been pretty sanguine,” he said. Investors for most of this year have bet the central bank will cut interest rates before the end of 2023, a view officials have often rejected.

PROBLEMS IN THE CORE

The Fed’s higher-for-longer approach could work if inflation slows more or less as the central bank expects, he said. But it could also rattle financial markets, dampen credit provision and hurt economic growth if core inflation remains sticky.

“The more concerning issue is if the flattening out of core inflation is itself prolonged,” said Kamin. Core PCE inflation has been stuck in a 4.5-5% range for essentially the last year. (See MNI INTERVIEW: Demand-Driven Inflation Rising-Fed's Shapiro)

The Fed is more likely to overshoot on rate hikes rather than undershoot because the perceived cost of allowing inflation to get out of control is higher than that of a mild recession.

“There’s an asymmetry in the risks. Fed Chair Powell absolutely does not want to go down in history as another Arthur Burns,” he said.

LONG RUNWAY TO SOFT LANDING

Inflation could still return to the Fed's target without a major spike in unemployment, Kamin said, which would be a major victory even if the economy has a mild recession.

“With demand slowing and once the lower rents actually show up in the price measures, it’s possible that gives you the soft landing scenario where inflation declines without a very large increase in unemployment and without a recession,” said Kamin. "The longer the economy remains positive albeit slowing, the greater the likelihood of that soft landing.”

Kamin’s research argues the Fed’s desire to contain wage growth as a way of dampening consumer price inflation clashes with workers seeking to recoup setbacks in their inflation-adjusted wages.

“The most plausible scenario might be the first scenario that we address in our paper, where workers don’t do much catching up and firms have no intention of reducing their markups,” he said. “I don’t anticipate a wage-price spiral and I’d like to anticipate workers could make up a little lost ground.”