The theme of the Federal Reserve Bank of Kansas City’s Economic Policy Symposium starting this week is “Labor Markets in Transition: Demographics, Productivity and Macroeconomic Policy.”
It’s an aptly timed discussion for an American economy that is rapidly changing as baby boomers retire and restrictive immigration policies constrain labor market growth.
While investors will look for any hint of a rate cut at the Fed’s next policy meeting on Sept. 17—they will not get it—there will be plenty of discussion of demographics, policy and productivity, at Jackson Hole including Fed Chairman Jerome Powell’s speech on Friday, that will inform the Fed’s decisions for the rest of the year.
With growth in the labor force slowing to a crawl, demand for workers has eased to 35,000 per month over the past three months as roughly 11,000 workers retire each day.
At the same time, heightened immigration enforcement and deportations are reducing the supply of workers, all of which make monetary policy decisions that much more challenging.
In addition, the slowing growth of the workforce is placing an artificial cap on the unemployment rate. That cap makes it more difficult to understand what constitutes full employment—4.2% is the current estimate—when setting policy.
Although productivity has increased for the past couple of years, a reduction in the labor supply entering the workforce will hurt the economy’s potential growth rate.
Should the tech sector not deliver the productivity gains that justify current elevated equity valuations, then the growth rate above the current Fed estimate of 1.85% would most likely be a low probability.
As such, we anticipate that the Fed will formally exit its current policy framework of flexible average inflation targeting that emphasizes shortfalls from maximum employment and move toward one that focuses on deviations from the Fed estimate of full employment.
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We would not be surprised if the Fed then links its estimate to its inflation target of 2%, which will provide symmetry around the central bank’s dual mandate of price stability and maximum sustainable employment. That mandate is experiencing growing tension as labor demand softens and inflation rises.
Powell has his work cut out for him in presenting a framework for understanding the evolution of the American labor market and private sector productivity.
Second, sometimes at Jackson Hole what is not on the docket but permeates the conference is far more interesting.
And the topic in the air is central bank independence and Powell’s legacy as he gets ready to make his final Jackson Hole speech before his term ends in May.
Powell likes to state that one cannot have maximum sustainable employment without price stability.
Perhaps it is time to add that one cannot have either without central bank independence.
It is a message that would be timely, well received and reassure business owners, investors and other policymakers during a time of extreme uncertainty.
In my estimation, the policy decisions that Powell makes over the remainder of his tenure will directly shape whether the Fed retains its independence
