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With unemployment near record lows and the number of job vacancies well above historical averages, Federal Reserve Chair Jerome Powell has suggested that there is room for the labor market to unwind without pushing workers out of their jobs or damaging wage growth.
That’s going to be a lot harder than it looks, according to new research from the Kansas City Fed.
“With economic growth slowing, firms will likely scale back vacancy postings,” Research and Policy Officers Huixin Bi, José Mustre-del-Río and Assistant Economist Chaitri Gulati wrote in an Aug. 10 bulletin. “A notable decline in job postings will likely coincide with an easing of tightness in [the] labor market, which could dampen inflation but also slow wage growth and raise the unemployment rate.”
The latter has yet to occur.
July’s shocking jobs report found that even after a pair of aggressive interest rate hikes — and two quarters of slowing economic growth — companies were still hiring at a much faster clip than they were in spring or early summer. What’s more, on Wednesday, the Labor Department reported that real wages increased by 0.5 percent between June and July.
But there have been signs the market is starting to wind down.
Early last week, the Labor Department announced that the number of job openings declined to 10.7 million in June. That’s still a very, very high number — and the labor participation rate remains locked below where it was prior to the pandemic — but those factors will have little bearing, Bi and Mustre-del-Río said in an interview.
Declines in job postings will likely coincide with higher unemployment and slowing wage growth — even during periods when unemployment is already exceptionally low.
“You would have to come up with a somewhat complicated story to argue why movements in participation would only affect [economic models] at certain points — or certain levels of unemployment and vacancy,” Mustre-del-Río said.
Even with Wednesday’s Consumer Price Index report signaling key improvements on the inflation front, the Fed still faces a difficult path ahead if it’s to bring down soaring costs without doing damage to wages or unemployment. The Kansas City Fed bulletin would argue that it’s almost impossible.
Some market observers, including those at Bank of America Global Research and Evercore ISI, put out statements shortly after the July CPI announcement saying the latest inflation data would give the Fed breathing room in September to raise rates by half a percent – rather than a third consecutive three-quarters of a percentage point hike.
Given the combination of low unemployment, surging nominal wages and fast-rising rent prices, that’s not a universally held view.
“Whatever camp you were in for the September hike, this report is unlikely to have materially altered your view,” Omair Sharif, founder of the independent research firm Inflation Insights, wrote in a note.
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Jobless claims data comes out at 8:30 a.m. … The Urban Institute and Brookings Institution Tax Policy Center is holding an event on the Inflation Reduction Act’s tax provisions at noon … The SEC is holding a closed meeting at 2 p.m.
ICYMI: INFLATION — President Joe Biden was in a celebratory mood on Wednesday after the CPI clocked monthly inflation at zero in July thanks largely to falling gas prices. While there were signs that headline number might improve, RSM’s Chief Economist Joseph Brusuelas warned before Wednesday’s release that “we have a lot more heavy lifting in front of us.” Case in point:
REACTION – Chicago Fed President Charles Evans, an alternate voting member on the open markets committee, said the central bank will continue to raise rates to bring down “unacceptably high” inflation, per Bloomberg’s Matthew Boesler.
— “I don’t believe we’re out of the woods yet in terms of having inflation as the top issue for a lot of our families. A number in the 8.5 [percent] range is obviously four times the Fed’s target,” Rep. French Hill said in an interview. The Arkansas Republican attributed sharp declines in gas prices to people curtailing travel. “We saw in the month of July the demand for retail gas pull off and that’s purely because of people just not being able to afford it. “
— Carlyle Group’s Head of Global Research Jason Thomas, a former economic adviser to President George W. Bush, said the stubbornly high inflation around rents can be attributed to the country’s “structural shortfall” when it comes to housing.
“You could really see core inflation down close to target by year end were it not for shelter, were not for primary rents, were not for what primary rents imply about owner equivalent rent,” he said. “When you look at the data in terms of cumulative housing starts it looks to be somewhere between one-and-a-half and 4 million short of what is actually necessary.”
– Wells Fargo Institute Senior Global Market Strategist Scott Wren doesn’t expect a more forgiving Fed: “We do not agree with some market pundits who believe the Fed will ‘pivot’ in reaction to potentially lower headline inflation by pausing or reducing the magnitude of rate hikes this year,” he wrote in a market commentary. Wells Fargo Institute is still projecting a 75-basis-point increase at the Fed’s September meeting.
FORM PF — From POLITICO’s Declan Harty: “U.S. financial regulators are moving to give Washington a deeper look into how and where Wall Street hedge funds are putting their money to work. On Wednesday, the Securities and Exchange Commission voted to propose a slate of sweeping new disclosures for private fund advisers to include in the Dodd-Frank-enacted confidential filing known as Form PF that’s regularly submitted to regulators.”
In the aftermath of the Three Arrows Capital collapse, one thing the SEC wants to know is how hedge funds are developing exposure to digital assets.
IN NEW RULE, CFPB CAUTIONS TECH FIRMS ON FINANCIAL ADS — The Consumer Financial Protection Bureau is warning big tech companies they’re not exempt from consumer finance laws if they help design and place financial ads.
— Not like other advertisers: In an interpretive rule released on Wednesday, the agency said tech companies (like Google) who work closely with financial firms on their ad strategies will face more stringent regulatory oversight than print or TV advertisers. Given their intimate involvement in the ad-making and ad-placing processes, the CFPB warns “digital marketers” do not qualify for the exemption provided to more traditional advertisers who only provide “time and space” for financial ads.
— Burgeoning alliance: In remarks at the National Association of Attorneys General Presidential Summit in Iowa, CFPB head Rohit Chopra said the new rule was driven by the increasing convergence of activities between finance and tech companies.“There’s now growing interest from big tech firms and others to find new ways to harvest and monetize our very sensitive personal financial data — and many tech firms are on the hunt for it,” Chopra said. He added that the collection of intimate financial data, including through ads, represents a new way for large tech platforms to “monetize [and] expand their empires.” – POLITICO’s Brendan Bordelon
BIG SPEND — From WSJ’s Anne Tergesen: “If inflation remains at the current level, on average, over the next two months, the approximately 70 million retirees and disabled people who receive Social Security benefits could see their monthly checks rise by about 9.6% in 2023, according to estimates from the nonprofit Senior Citizens League.”
BEHIND THE NUMBERS — POLITICO’s Dan Goldberg has an important story about how inflation, exploding wage growth and slow (or non-existent) Medicaid reimbursement rate increases has created a crisis for companies that provide services for the intellectually and developmentally disabled. “While the workforce crisis predates the pandemic, it was also worsened by it as the number of work-from-home opportunities increased, luring employees away from jobs that tether them to residents. ‘They can work for a call center, stay home and earn the same amount … and not worry about daycare,’ said Barry Simon, president and CEO of Oak Hill, which provides disability services in Connecticut.”
Notably, the private equity industry has also taken an interest in these businesses.
SPEAKING OF PE — POLITICO’s Brian Faler: “After Sen. Kyrsten Sinema (D-Ariz.) shot down her colleagues’ latest attempt to go after the so-called carried interest loophole, Robert Willens, a longtime Wall Street tax adviser, felt confident of one thing: The break is not going away — ever. ‘By this point, it’s kind of ridiculous to think the law is ever going to change,’ he said.”
OCC — Sens. Elizabeth Warren (D-Mass.), Dick Durbin (D-Ill.), Sheldon Whitehouse (D-R.I.), and Bernie Sanders (I-Vt.) want the Office of the Comptroller of the Currency to rescind Trump-era cryptocurrency guidance for banks as lawmakers and regulators scramble to set rules for digital marketplaces. “In light of recent turmoil in the crypto market, we are concerned that the OCC’s actions on crypto may have exposed the banking system to unnecessary risk, and ask that you withdraw existing interpretive letters that have permitted banks to engage in certain crypto-related activities,” the lawmakers wrote in an Aug. 10 letter.
RULES FOR THEE AND NOT FOR ETH — From American Banker’s Claire Williams and Brendan Pedersen: “The nation’s top banking trade associations told the Biden administration that its cautious approach to digital assets is stifling the industry, while the broader crypto sector continues to operate with little government oversight. The comments … reiterate an argument that banks have made for years: that the highly regulated banking sector is one of the safest places to experiment with crypto, rather than its less-regulated nonbank counterparts.”
STRATEGY — Reuters: “San Francisco-based blockchain payments company Ripple Labs Inc is interested in potentially purchasing assets of bankrupt crypto lender Celsius Network, according to a company spokesperson.”
Rebecca Kysar has left the Treasury Department where she was counselor to the assistant secretary for tax policy and co-led global negotiations on a new international tax framework. Kysar is heading back to Fordham Law School where she’s a law professor and focuses on tax and budget issues. – POLITICO’s Daniel Lippman
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