Bloomberg has a few articles today with prominent economists reacting to the current strong jobs report. Here’s the president of the Chicago Fed Austin Goolsbee:
Federal Reserve Bank of Chicago President Austan Goolsbee praised September’s strong jobs report but cautioned against placing too much stock in one-month figures, adding that there are risks that inflation could fall below the central bank’s 2% target would remain.
“This jobs number today, and the entire report, is a fantastic report,” Goolsbee said in an interview with Bloomberg Television’s Michael McKee on Friday.
And here it is Larry Summers:
Former Treasury Secretary Larry Summers said Federal Reserve‘s decision to cut rates last month was a mistake after new data showed US employment is increasing grow Last month exceeded all estimates.
“In retrospect, the 50 basis point cut in September was a mistake, but not one of major consequence,” Summers, a paid contributor to Bloomberg TV, said in a after on X.
Nonfarm payrolls rose by 254,000 in September, the most in six months. The unemployment rate fell to 4.1% and hourly wages rose 4% from a year earlier, according to Bureau of Labor Statistics figures released Friday.
I’m with Summers. While it is true that inflation could briefly remain below the 2% target, that would likely be due (if that to happen) to positive supply shocks. The Fed should focus on demand-side inflation, and all the evidence I see points to continued strong NGDP and nominal wage growth. It is not true that “the whole report is an excellent report.” Annual nominal wage growth accelerated to 4%, which is too high. We need further monetary restraint to sustainably reduce price inflation to 2%.
I think Summers is right that a smaller rate cut would have been better, and also that the mistake probably wasn’t very consequential. If the Fed makes a serious mistake (and it’s too early to reach that conclusion), it would likely be due more to excessively expansionary forward guidance than to setting a Fed Funds target of 0 all at once .25% too low. At this point, I’m willing to give them the benefit of the doubt as most market-oriented future indicators look pretty good. However, it is clear that the mini-panic about the labor market of a few months ago was premature. We were not teetering on the brink of a recession.
In my view, both Fed hawks and Fed doves are making the same mistake: they respond asymmetrically to supply shocks depending on whether the implications support their policy preference. Thus, pigeons tend to correctly discount increases in inflation due to a decrease in aggregate supply, while ignoring the significance of decreases in inflation due to an increase in aggregate supply. Hawks make the opposite mistake. Recently, the aggregate supply situation has been quite good, resulting in headline inflation that is lower than core inflation (and also lower than predicted from NGDP growth or nominal wage growth). It probably won’t stay that way.
The only ‘flexible average inflation target’ regime that works in the long run is stable NGDP growth of around 4%. We’re not there yet, but the Fed has made significant progress since 2022’s very high inflation.