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**APRIL 12, 2023**

Kuttner on TAP

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**** Will the Fed Wreck an Improving Economy?

Both the inflation and the employment outlook continue to improve.

Two recent official reports suggest that the economy continues to do
well on both the jobs and inflation fronts.

Today's report on the Consumer Price Index for March
<[link removed]> by the Bureau of Labor
Statistics shows a continuing pattern of disinflation. Prices generally
increased by just one-tenth of 1 percent in March over February.
That's an annualized inflation rate of just 1.2 percent, or well below
the Fed's own (unrealistically low) target of 2 percent. Food and
energy prices both declined.

The only notable increase was in the BLS category of shelter, which
includes both rental and owner-occupied housing. That increased in March
by 0.6 percent over February.

But higher housing costs are the result of the Fed's own interest rate
policies, which make mortgages more costly and depress both sales of
existing homes and new housing construction. That in turn throws more
people back on the rental market, raising rents. If the Fed began
cutting rather than raising rates, housing costs would subside.

Meanwhile, the jobs front also looks excellent. Friday's employment
report <[link removed]> shows that the
economy is continuing to generate more jobs, though at a reduced rate.
The other good news in the report is stunning.

Employment levels are now back to pre-pandemic levels for every major
subgroup, and so is the rate of labor force participation. The overall
rate of unemployment is just 3.5 percent. Black unemployment is at a
historic low
<[link removed]>,
and at 5 percent is well below a pernicious trend over the past several
decades, where it lingers at twice the overall unemployment rate.

Normally, you might expect that near-full employment would produce wage
pressures and drive inflation. But wage increases, of around 4 percent
on an annual basis, have actually lagged the rate of inflation.

The reason for that wage moderation is not good news-the long-term
weakening of the labor movement. And while there are some pockets of
encouraging union organizing, it will be a long time before those gains
translate into general wage pressures.

One other positive sign is reported labor shortages in some scattered
sectors. That's also good news, in that it will force employers to
offer better wages for those jobs. But that will not translate into
general wage-driven inflation.

Last June, Larry Summers predicted
<[link removed]>
that it would take two years of 7.5 percent unemployment to bring
inflation down to acceptable levels. This is a case of burning down the
village in order to save it, except that the village is the entire
economy. Once again, Summers has been revealed as profoundly
misinformed.

Given the Fed's previous rate hikes, coupled with normalization of
supply chains (which has nothing to do with Fed policy), the economy is
now on track toward low inflation coupled with close to full
employment-the famous "soft landing." If inflation is 3 percent rather
than the Fed's needlessly stringent target of 2 percent, that's no
big deal.

The question now is whether Fed Chair Jay Powell will have the sense to
declare victory and call it a day. The next meeting of the Fed's
policy-setting Open Market Committee is May 2-3.

One member of the FOMC, Chicago Fed president and Obama alum Austan
Goolsbee, has already signaled that it's time for a pause in rate
hikes. In remarks prepared for a speech to the Economic Club of Chicago,
as reported by the

**Financial Times**
<[link removed]>,
Goolsbee warned, "Given how uncertainty abounds about where these
financial headwinds are going, I think we need to be cautious ... We
should gather further data and be careful about raising rates too
aggressively until we see how much work the headwinds are doing for us
in getting down inflation."

The shakiness of the banking industry, caused by a combination of weak
Fed supervision and overly aggressive rate hikes, has put Powell on the
defensive. Goolsbee's remarks suggest the beginning of a long-overdue
debate inside the Fed and the end of automatic deference to the hapless
chairman.

~ ROBERT KUTTNER

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