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  • Writer's pictureJoe Carson

The Fed Is On A Collision Course With Itself

The Federal Reserve is on a collision course with itself. Policymakers are trying to break the cyclical inflation cycle and create economic conditions to ensure inflation remains close to its 2% target. The primary economic condition policymakers consider critical is to re-create an environment of price stability is a higher jobless rate. In 2022, the unemployment rate ended lower than when it started. So how far will they go with rate policy to get the labor market conditions it wants?

In December, the civilian unemployment rate of 3.5% was 0.5 percentage points below where it started in January and matched the lowest rate since the late 1960s. The drop in the jobless rate was a function of fast job creation. Payroll employment posted job gains of 4.5 million, and a household employment figure using the payroll employment concepts showed an increase of 4.2 million for the entire year.

At the start of 2022, with the jobless rate at 4%, there were 1.75 job openings for every person looking for work. Based on the 300,000 drop in the number of unemployed in December, the ratio of job openings to the number of unemployed will be higher at year-end than where it started the year.

So if policymakers are committed to slowing inflation and ensuring the economic environment is consistent with its 2% target, they are far from accomplishing that, given the tightness in the labor markets. Consequently, the Fed is on a collision course with its prescribed policy path as it has yet to accomplish or move closer to the benign economic outcome (i.e., slack in the labor markets) it seeks. Investors should know their goals since it could result in a fed funds rate moving well above the 5.1% target in the Fed's latest projections.

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