Fighting Inflation – Why This Time Feels Different and Could Actually Be Successful

Key Takeaways

  • There were 11.4 million job openings in April equaling 1.92 job openings per unemployed person, a huge benefit to a Fed attempting to bring down inflation without cratering the job market.
  • The Fed’s ideal labor market resolution is that companies fill current openings while maintaining their current workforce.
  • Friday’s jobs report showed a deceleration in wage growth alongside an increase in the labor force participation rate, both good signs for a Fed in the early innings of a tightening cycle.



The Fed’s ability to bring down inflation without triggering a recession is batting a cool .111, a rare feat to say the least.  Only once in the nine times since 1961, the central bank has set out on a course of interest rate hikes to rein in inflation has it been successful.  The year was 1994, the Alan Greenspan led Fed began a tightening program that resulted in a 3% increase in interest rates in just over 12 months (very similar to the projected current path) and resulted in the elusive soft landing.  Inflation slowed, while the second half of the decade saw annual economic growth of greater than 4% and equity markets that provided extraordinary gains.


So why can’t the current Fed just copy Greenspan’s playbook from 28 years ago?  The fact is the Fed at that time had many factors in its favor that the Powell led central bank of today does not.  In 1994 inflation had yet to run wild, demographics were disinflationary, and globalization was increasing; all three of which are not the case today.  There is little doubt that the circumstances facing today’s Fed are more challenging than those faced by Greenspan’s group in ’94 but there are some early signs of hope.


When looking at these data points, keep in mind that the Fed’s ultimate goal here is to curtail inflation without crashing into a recession, meaning in certain areas of the economy (i.e. wage growth), bad news may actually be good news and vice versa.


For example, the May jobs report showed that U.S. employers added 390,000 jobs in May, down 46,000 from the prior month but still stronger than economists expected.  Average hourly earnings were down from the prior two months as well but still reflected a 5.2% gain from a year ago, and the labor force participation improved as 330,000 people entered the labor force.  Private payrolls grew at their slowest pace in May since April 2020, while unemployment insurance claims rose to 200,000 from 166,000 in March.  The good news here is that the jobs report landed directly in the not too hot, not too cold Goldilocks zone.  Job creation continued to slow but was still quite strong, and wage growth posted the smallest gain (+0.3%) since February but avoided a negative print.


All of this points to a labor market that is a little less hot than a few months ago and the cooling has come without a jump in the unemployment rate.  It’s certainly early in the process but this is a welcomed sign and provides some hope for the Fed as it attempts to navigate this very delicate balance. Next up will be this week’s Consumer Price Index data where markets will be watching closely for signs of a peak in U.S. inflation.



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