Is a Hot Jobs Market a Bad Thing?

The Federal Reserve has been all over the news lately, and it’s not hard to see why. Federal Reserve Chairman Jerome Powell’s comments have been in the headlines again, this time about interest rate increases. This news had the stock markets dipping downwards yet again, but why is this the case when the job market appears to be thriving?

Why the Concern Over Positive Jobs Reports?

It might seem odd that a healthy job economy would cause concern among the Fed. However, Joseph Gagnon, the senior fellow at the Peterson Institute for International Economics and former visiting associate director for the Federal Reserve Board’s monetary affairs division, explains that it all comes down to the fear of the economy overheating.

“If we could sustain 3% or 3.5% unemployment, a record low, the Fed would be delighted if we could stay there, and inflation would come back down, and everything would be fine,” Gagnon says. “The worry is that the economy is just overheating, that too much spending is going on for what the economy can produce. And we see that in the labor market.”

In other words, it comes down to supply and demand. If the available workforce isn’t able to keep up with the pace of production, the resulting shortages create inflation, which can damage the economy.

The Fed’s Dual Objectives

For many, a good job market and controlled inflation would be a win-win situation. However, the Federal Reserve faces a dual set of goals that often conflict with each other. Managing inflation is one of these objectives, with the current target at 2%.

The other objective is to encourage a healthy level of employment across the United States. While controlling inflation is important, having a thriving job market is equally as essential for the stability of the US economy.

However, in terms of setting priority, inflation has become the overriding concern over the past year and a half. According to Lara Rhame, chief US economist and managing director for investment research for FS Investments, “Right now they see both of these objectives, and they’re weighing which one is more important to tackle and which one is further off course, and by far and away, inflation has been over the last year and a half, very far away from their targets – way too high.”

Related Facts

• The US’s job market rose by 304,000 in January 2019, the largest increase over a year.
• In January 2019, unemployment was at a record low of 3.4%.
• The Consumer Price Index, an indicator of inflation, rose 6.4% year-over-year (YoY) in January 2019.

Key Takeaway

The Federal Reserve is trying to tread a delicate balance between two key objectives: controlling inflation and creating a thriving job market. However, when the economy appears to be overheating, it creates inflation, which can damage the economy.

Conclusion

While it may seem counterintuitive for a good jobs market to be a cause for concern, the Federal Reserve has to consider the bigger picture. Controlling inflation is one of the key objectives of the Federal Reserve, and it’s important to remember that having a stable economy is a priority for everyone, including the Fed.