The Federal Reserve has already called “uncle.” Forget the soft landing. In the minutes of the March meeting Federal Open Market Committee came the words, “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”
That admission on page 6 sounded like a door closing. All the talk about piloting the economy to a relatively painless touchdown is gone. Given the Fed’s track record in classifying inflation as transitory, misjudging the strength of the labor market according to former New York Fed President William Dudley as MarketWatch reported, increased rates while knowing as a bank regulator that some institutions could be threatened, and as others have noted, perhaps moving too swiftly and hard raising rates, some salt should accompany even the “mild” characterization.
The labor market may be the most troubling part because it has long ceased acting as it once did, with more unemployed people than jobs. Let’s take another look at this graph from the Federal Reserve Bank of St. Louis, which shows the ratio of unemployed people to open jobs.
There’s about 60 people per hundred jobs, and the recent range is at historically low levels since at least 2000. Many economists, including those at the Fed, keep saying that unemployment has to rise before things will straighten out. But when the number of open jobs far exceeds the people available to do them, how is that going to happen? The reality is a bigger barrier for labor hawks to clear because the skills people have may not match up well with the requirements for positions. If you were working on a factory line, there is no quick path to managing big data analysis, anymore than having an expertise in statistical modeling would help you if the only job open were as an automotive mechanic.
But the Fed, while powerful, also has limited abilities. Even if doing its best, the institution can change interest rates or the amount of bonds it holds. Communication, when done well and in time, informed by facts, can also help. The Fed has no direct power over fiscal policy, which is also necessary to address economic issues. It is supposed to ensure even inflation and prices and also strong employment. The limitations become blinders, because how else do you perform a job restricted to only certain mechanisms that may not do what is needed?
There’s an old saying that in an emergency the Fed acts until it breaks something. In this case, the Fed will break the economy because it doesn’t know any other way to control. In classical control theory, engineers look at the forces acting on a system and then devise collections of positive and negative feedback. Used in proper time, they can nudge a plane or complex electronics circuit or even a supply chain to the desired performance.
Waiting for data to come in, a month or two in arrears, in turbulent times can be like steering a truck hauling a double trailer by looking back 15 or 20 blocks. “We’re still sliding a little left, better turn harder right,” and in the distance since 14th Street the second trailer is edging up against the righthand sidewalk. This is also like making investment decisions based on how a stock or fund did in the past, even though past performance is no guarantee of future results.
Even worse, the public back and forth—“We’re good, uh, wait, problems, but we can get through them, kind of … we hope”—creates its own problems, as economist, former Fed staffer, and now consultant Claudia Sahm noted in her newsletter.
She says currently there is a lot of negative news in the media, and to be fair, the financial press frequently runs hot and cold. Slavering with excitement in the run-ups to big disasters like the dot com meltdown and the Great Recession/global financial crisis. And then ready with pitchforks after.
Currently, it can be hard to be positive, especially as many in financial and economic media have to hang on the words of economists and may be too timid to question what they’re being told. Understandable, as big, career-breaking blunders come easily. And yet, the largest errors at the worst times seem to come from listening to the experts.
Economics, combined with some doses of practical psychology, says that people start to prepare for what they feel is coming. There’s a terrible positive feedback loop, the type that keeps pushing a system in the direction it’s already moving and that can be responsible for big oscillations and driving into a brick wall.
The positive feedback in this case is negative news: things are getting worse, there’s going to be a recession, there are layoffs, the unemployment rate needs to go up. Or, as that old FedEx
The reason this negativity is “positive” is that it will get consumers and businesses to react to expected problems, pull back on spending, not hire, and essentially ignore the news that a lot of good things have happened. Creating a recession out of force of will.
“For various reasons, people may remember bad news more than good news; however, it’s also the case that the news reports about the labor market are often bad now, despite its objectively great conditions,” Sahm wrote. And the media writes it because that’s what the experts say.
Getting out of the path of a potentially unnecessary recession is difficult. It may still be possible, because as Sahm separately noted, there’s been a lot of good. Some racial gaps in labor force participation are at historical lows. More people who are disabled are working than before the pandemic. Poverty fell during an economic disaster. People are more likely to have health insurance.
Yes, the federal debt went up, but if the country can keep these improvements, there could be a bigger long-term payoff.
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