An Ignoble Experiment: 🥴 Tough backdrop

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Axios Macro

By Neil Irwin and Courtenay Brown · Oct 04, 2022

Wow: Job openings fell sharply in August — the biggest drop on record, if you exclude the hit to vacancies at the pandemic's onset. Hiring, meanwhile, remained strong. The data is backward-looking, but it's a labor market development that's sure to please Federal Reserve officials (more below).

But first, a look at how the global backdrop has gotten more complex for the Fed.

Situational awareness: In his first public speech since taking office, Fed governor Philip Jefferson said he was "concerned that fluctuations in prices of the goods to which people pay most attention, like food and housing," could put upward pressure on consumers' inflation expectations.

Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 678 words, a 2½-minute read.

1 big thing: Complex times for the Fed

Photo illustration of two Jerome Powell's facing each other

Photo illustration: Sarah Grillo/Axios. Photos: Drew Angerer/Getty Images

The Fed faces an increasingly complex backdrop: Domestic inflation points to a case for the central bank to press on with historically large rate increases.

But international conditions, which have been deteriorating sharply, present a case for the central bank to (perhaps) slow down.

Why it matters: Stateside, inflation is uncomfortably high and still rising. Globally, financial conditions have tightened swiftly. There are real, growing concerns about the damaging spillover effects of the Fed's aggressive interest rate hikes.

There are worries, too, those outsized moves could crush the U.S. economy more than necessary — when there are some signs growth is already slowing.

What they're saying: "The Fed has to be laser-focused, for the time being, on the U.S. economy and high inflation. That can change if international stresses continue to manifest and become extreme," says Steve Friedman, an economist at MacKay Shields.

Driving the news: Yesterday, a United Nations agency called on the Fed and other central banks to "reverse course" because of wayward consequences for the rest of the globe. It echoes warnings from influential economists, the World Bank and others in recent weeks that Fed hikes may hammer the global economy.

For smaller nations, significant tightening has resulted in a troubling feedback loop, with emerging markets seeing notable capital outflows. The dollar is near its strongest levels in decades, which has undermined other currencies.

Policymakers abroad have responded with their own historically large interest rate increases — in part, to help stem depreciation that's making price stability more difficult to achieve.

For instance, central bank officials in Colombia cited the following after its super-sized rate hike last week: "The monetary policy of developed countries has become more contractive than expected, which has been reflected in a deterioration in international financial conditions and in a significant depreciation of the peso and other currencies."

What they're saying: Speaking at a conference yesterday, Richmond Fed president Tom Barkin warned about "collateral damage" from the strong dollar to international economies and financial systems.

But, he said, "in the end, our mandate is to help operate the US economy. So you worry about it most in terms of does it affect the US economy."
New York Fed president John Williams, too, focused on what's at stake in the U.S. in public comments yesterday that centered on troubling underlying inflation pressures.

The intrigue: Those hoping for a reprieve from the intense pace of global monetary tightening got a surprising gift today from Australia — The country's central bank delivered a smaller-than-expected quarter-point interest rate hike.

In a statement, central bank governor Philip Lowe cited the "source of uncertainty" in the outlook for the global economy.

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2. Jobs shocker

Data: Bureau of Labor Statistics; Chart: Axios Visuals

First, the good news: The Fed just got a big signal that its offense against inflation is bearing fruit.

Now, the bad: The number of job openings as measured by the Labor Department (JOLTS) plunged in August by over 1 million — well more than economists had forecast.

In fact, the drop was the largest since April 2020 (the height of COVID-19 lockdowns, for those with short memories). Yet quits and layoffs were marginally changed, in keeping with the theme that jobs still remain plentiful.

Why it matters: Independent of the monthly payrolls data, JOLTS is one of a handful of reads giving insight into the health of the jobs market.

With about two open jobs for every person seeking one, JOLTS has characterized an impossibly torrid labor market — an element of growth the Fed is looking to tame in the battle against price pressures.

What they're saying: "All we can say for sure is that this is the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in labor demand," wrote Ian Shepherdson at Pantheon Macroeconomics.

"If it continues over the next few months, and core inflation falls as much as we expect, the Fed will not be hiking by 125 [basis points] by the year end."
The data is "the first clear sign of weakening labor demand [that] will pressure the Fed to do less, if it persists."