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What’s Got the Fed in a Pickle? Jobs, Jobs, Jobs

What’s Got the Fed in a Pickle? Jobs, Jobs, Jobs

November 08, 2022

Last week I posted an article about how markets are almost completely dependent on the rhetoric coming from the Federal Reserve Bank. Inflation is still arguably high but there are morsels of data showing that the rate hikes are slowing down parts of the economy. So why is a Fed pivot nowhere in sight and what is causing economists to continue to extend and increase Fed rate hikes? It’s the job market, stupid.

I’ll briefly look at the US labor market from three different lenses to show what the Fed sees as a threat to higher inflation: Job availability, labor force participation, and wages.

Last week, the Job Openings and Labor Turnover Survey (also knows as the JOLTS survey) was released, with a greater than expected level of job openings than the prior month. With 10.72 million job openings and roughly 6 million unemployed people, there is currently 1.8 job openings for every person looking for one. In other words, based on simple math, no one should be unemployed, but there continues to be a mismatch between job requirements and candidate skills.

However, this is not the whole story. The Labor Force participation rate is currently at 62.2% - that is the percentage of the working population that is either working or actively looking for work. Unfortunately, the participation rate pre-covid was more than 1% higher – which translates into a shortage of 3 million people in the labor market. That wouldn’t solve the tightness in the labor market but it would reduce the ration of jobs available for unemployed person to a more reasonable 1.2.


As the chart below indicates, the labor force participation rate has dropped dramatically within the 55+ demographic. Reasons for this can vary from taking early retirement to fear of being infected by the virus. Regardless of the rationale, however, the drop in participation within this age cohort has added to the shortage of available workers.

Lastly, the effect of a tight labor market has driven up wages as employers have had to either provide raises to reduce turnover or to lure employees away from competitors. This is driving up wages, potentially causing a wage price spiral that leads to further inflation as employers raise prices to maintain margins in light of higher costs.

The dim light at the end of the tunnel is that wage growth seems to have peaked. Unfortunately, it remains elevated and could continue to drive up wages – causing inflation to remain higher for longer – pushing the Fed to continue it’s aggressive rate hiking cycle.

With the Consumer Price Index data due out this week, it will be interesting to see if inflation eased in October or if we continue to see acceleration in prices – particularly in the service sector. It will be a key metric the Fed will evaluate during their next FOMC meeting as well as the PCE index – the Fed’s preferred measure. But a slowdown in the labor market would be a welcome trend and a potential catalyst for the Fed to slow the pace of rate hikes.