MNI INTERVIEW: Worries Over US Jobs Weakness Overdone- Bullard

MNI (WASHINGTON) - U.S. employment conditions are normalizing as expected after overheating for months in the post-Covid economy, and talk of a significant risk of recession is overblown, former St. Louis Fed President James Bullard told MNI. 

It will be further disinflation rather than labor market weakness that spurs the beginning of monetary easing by the Federal Reserve, Bullard said. Whether that happens in September or later depends on the next two inflation reports. 

"It’s true the unemployment rate has come up some, but what’s unusual is it was below 4% for such a long time. The rate is normalizing toward the natural rate, which most people estimate to be in the 4% range. Very few people would say the natural rate is 3%. So it’s just doing what you’d expect," he said in an interview. U.S. joblessness breached 4% in June for the first time since late 2021. 

"Only when you get above the natural rate and then it continues to tick up, would there be grounds for discussion or concern. We’re not at that point yet." 

STEADY STATE JOBS

Annual growth in nonfarm payroll employment has decelerated to 1.6% from 2.5% a year ago but remains above its pre-pandemic 1.3%, he said, noting the measure screens out seasonal adjustment quirks. The ratio of vacancies to unemployed workers is back to where it was before the pandemic at 1.2, down from a high of 2. 

"That tells you the labor market is slowing, but slowing to trend, not recessionary levels. It helps explain what a soft landing is," Bullard said from the Mitchell E. Daniels Jr. School of Business at Purdue University, where he is dean. 

Inflation, the other half of the Fed's mandate, will need to fall in line with FOMC expectations before the Fed can cut, he said. 

WILL INFLATION COOPERATE?

The FOMC began the year projecting core PCE inflation to fall to 2.6% by year-end. It was forced to upwardly-revise that figure by two-tenths in June and delay rate cuts. 

The resurgence in inflation in the first quarter increasingly looks like an aberration, Bullard said, though there's some risk that base effects boosting prices in the second half of the year may be interpreted too hawkishly. Fundamental imbalances in the housing market are also likely to keep shelter inflation high, but the Fed shouldn't take too much signal from that, Bullard said. 

"What you’d like to do in September is to say we’re on track to hit 2.6% or better, and we're making more progress than thought, so that’s why we’re going ahead with a cut," he said. 

"If you come to the September meeting, and inflation is not as good as thought and you still want to cut, you’ll have to point to something else, like the real economy and labor markets. But you’d hate to say that because markets will take that as a signal of weakness in the economy." 

LITTLE MODIFIERS

To that end, Fed Chair Jerome Powell will shy away from too strongly signaling a September cut, Bullard said. (See MNI INTERVIEW: September Fed Cut 'Not Assured' - Lockhart)

"That’s part of the art form of this July meeting. If it comes off as too dovish, then markets will price in November and December, which is already happening to some degree. He’ll want to send a signal that the committee is on track but wants some optionality." 

"Even a little bit of a modifier would send a signal to markets while preserving optionality," Bullard said. (See MNI INTERVIEW: Fed To Open Door To Sept Cut Next Week - English)

The timing of the election should have no bearing on the FOMC's decisions, he said. Powell has been warned by Republican lawmakers and Donald Trump that cutting before the election could hurt Fed independence, but "I think the committee plays it straight up and says if we have the data and it makes sense for policy, they’ll just go ahead."