Former Federal Reserve governor Randy Kroszner joins Julie Hyman and Josh Lipton on Market Domination to break down what the stronger-than-expected September jobs report means for the Fed going forward.
Kroszner defends the Fed’s September 50 basis point cut, saying, “Basically every other central bank around the world has started the cutting cycle. The Fed has actually started a little bit later, but they started a little bit more boldly.” He says the Fed has the option to not cut at all if the data warrants. "If the numbers are still kind of screaming like this, they may decide not to cut at all.”
“If the inflation rate keeps moving down and the job market stays reasonably strong, then they can kind of be on the path that they've been on with some smaller cuts, but let's say the inflation rate doesn't start to come down. Maybe this strength that we're seeing in the labor market is reflected in higher wages because wage growth was still 4%. You know, their goal is to get inflation down to 2%. Now if you have really strong productivity growth, then you can have 4% wage growth and still get 2% consumer price growth. But right now, we're not seeing productivity growth quite that strongly. So they've got to bring the wage growth down. If the wage growth isn't coming down, and if there's still a lot of pressure they may have, and the labor market remains strong, they might have to reconsider whether they're going to cut it at all. Many other central banks around the world did an initial cut and then took a pause.”
He explains, “The Fed and everybody else would like to see people have higher incomes, and that's really great. But they also have this goal of trying to get inflation down to 2%. One of the key inputs into really any production process, whether it's services or traditional manufacturing, is wages. And so if wages are going up at 4%, your key input costs are going up at 4% unless those workers are becoming more productive... that is having high output per hour and high productivity growth. It's very hard to square having your key input go up at 4% when prices are only going up 2%. And so that's where the tension is. If we get productivity growth up, that would be terrific. But otherwise, we may have to see a little slowing of the heat in the wage growth to make all these pieces fit to get to their 2% target.”
Ahead of the November election, the former Fed governor says immigration will be a “key issue” given that the market has seen “so much growth of jobs without the number of people in the labor force really growing that much.” He says, “If you really stop the inflow of laborers, all other things being equal, the price of labor is going to go up. Wages are going to start to go up faster, and then it's going to be tough for the Fed to meet that 2% goal.”
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This post was written by Naomi Buchanan.