The Bureau of Labor Statistics (BLS) recently announced that 850,000 jobs were created in June. The unemployment rate was 5.9%. This figure is very encouraging since the jobs report from the prior two months was so poor.
Originally, economists had hoped that by June the economy would add about one million jobs monthly for at least a month or so. Because the April and May jobs report was so poor, economists reduced their expectations to only 700,000 jobs for June, so the actual number beat their most recent forecasts.
As the economy continues the rapid growth that started last May, the unemployment number will fall further and could be less than 5% by year-end or shortly thereafter. How fast is the economy growing?
The second quarter of this year just ended. In about three weeks, the GDP growth rate for the quarter will be announced. The consensus view is that the economy grew at about a 9% annual rate. That means for the past 12 months, economic growth has been more than 12%. This represents a very rapid recovery from the deep, but short-lived recession in 2020.
Next week, BLS will announce the consumer price index (CPI) for June. So far this year, the CPI has been very high. In fact, since January, consumer prices have increased 2.7%. The Biden administration and the Federal Reserve (Fed) both believe that the inflation experienced in the first five months of this year is temporary, or they say transitory.
That means as the economy continues to fully re-open the increased output will put downward pressure on price so there will be very little inflation for the rest of the year. That means, they believe, that inflation for the entire year will be about 3.5%.
As a result of that belief, the Fed will keep expanding the money supply by purchasing $120 billion of government bonds monthly. Since the Fed just electronically prints the money to make that purchase, the money supply increases.
The Fed also believes that interest rates should be held down at or near the zero range. This is needed to continue to increase demand so the economy will continue to grow.
This may be the first time in modern history that the Fed was not out in front of inflation. Normally, if there is any sign of possible inflation, the Fed will move quickly before inflation gets to be a problem. This time they are waiting because of their belief that the inflation we are currently experiencing is transitory.
In December 2016, the Fed faced a similar set of circumstances in that there were some signs that inflation may accelerate. Rather than waiting the Fed took action. They raised interest rates one quarter of a point. They did that eight times over the next two years.
The Fed believes this was the correct action noting that the increase in interest rates coupled with the reduction in bond purchases, took enough demand out of the economy to reduce inflationary pressure. But the actions did not take too much demand out of the economy so that a slowdown would follow.
The Fed should immediately follow the same actions. Housing prices, car prices and other consumer goods are rapidly rising in price. The Fed should respond by gradually raising interest rates and gradually phasing out the bond purchase program. These actions will reduce excess demand which should reduce inflation without having a significant negative impact on growth.
The longer the Fed waits to take action the more drastic the action will be. The Fed plans to wait more than a year before they start doing something like this. I suspect that they will change their forecast if the inflation number for June turns out to be as high as it was in April and May. They may also change their position once the GDP growth rate number is released at the end of the month.
Both of those numbers will likely show a strong, high growth economy with inflationary pressure. Then they will change their mind and start to talk about increasing interest rates and slowing the growth rate of the Money Supply.
The sooner they do that, the better for the economy.