Federal Reserve officials tout the U.S. economy’s strength as the reason why Fed tightening will not tip the economy into recession. The unemployment rate is the preferred metric of Fed officials who are spinning the tale of a strong economy. We provide an alternative.
The Fed is expert at one thing – pulling the wool over investors’ eyes. One could also argue that the Fed is quite adept at printing money. However, that is hardly something to be proud of as that very printing is the direct cause of the price inflation that plagues U.S. consumers and enterprises. Pointing to the unemployment rate is Fed spin because the unemployment rate does not contemplate unemployed workers who wish to have a job yet have given up on pursuing job opportunities.
TEK2day readers know that a more comprehensive measure of the U.S. employment situation is the Civilian Labor Force Participation rate which stood at 62.4% as of March 2022, up from the COVID trough of 60.2% (April 2020), yet below pre-COVID levels of 63.4% (February 2020) to say nothing of 20 years ago when far more Americans worked as reflected by a Labor Force Participation rate of 66.7% (April 2002). If we take a trip back in time to the last time the Fed tightened monetary policy (the Fed’s failed policy of Q4 2018), labor force participation stood at 63.0%.
Therefore, why does the Fed believe that the current U.S. jobs market is stronger than it was in Q4 2018? There is far more public debt outstanding today ($30 Trillion) vs. Q4 2018 ($22 Trillion). There is far more corporate debt outstanding today ($11.7 Trillion) vs. Q4 2018 ($9.7 Trillion). Higher debt levels at soon to be higher rates hinder corporate hiring rather than bolster it. Thus, the labor force participation rate and the inferior unemployment rate are likely to tell a story of growing unemployment levels as the Fed tightens.
The Fed Funds Rate peaked in April 2019 at 2.42% before the Fed caved and restarted QE. Therefore, why does the Fed believe that this time it will be able to fight inflation (and presumably take rates substantially higher than April 2019’s 2.42% level), without crashing the equity market or the U.S. economy? As we recently wrote, Treasury yields are going higher and at some point the U.S. economy and/or the equity market bull run will eventually break.