Today let’s talk about the Federal Reserve’s “dual mandate” from Congress. It’s a phrase that gets thrown around a lot, so it’s worth unpacking.
The Federal Reserve Act of 1913 established the central bank as we know it today, and, later, Congress also charged (mandated, if you will) the institution to promote maximum employment as well as stable prices – thus, a dual mandate.
This has proven to be a difficult, if not impossible, task.
In 2012, for the first time in its history, the Fed established an inflation target. Even after trillions of dollars in quantitative easing and years of “ZIRP” (zero interest–rate policy) that target, 2%, is yet to be met.
The Fed seems perfectly happy with itself because the unemployment rate has fallen to historically low levels, now reportedly at 4.4%. Job creation seems to be moving at a healthy pace, but wages aren’t rising.
In fact, last Friday’s August jobs data only showed a 0.1% month-over-month increase in hourly earnings and meager 2.5% year-over-year gain.
There’s no getting around it: Wage growth was a disappointment once again.
And so the Fed seems confused (again).
The central bank links wages to lower-than-expected inflation. Over the last eight years, according to the Bureau of Labor Statistics (BLS), the U.S. economy has added about 12.2 million jobs. But a big assumption the BLS makes is the birth/death adjustment, which may have overstated job creation by nearly 50% since 2009.
The BLS model assumes an increase in new entrepreneurship and associated jobs. The BLS also fails to account for part-time jobs and contract jobs that replaced full-time jobs. Meanwhile, the labor force participation rate has been falling for the last 17 years and hasn’t been this low since the Carter administration. This statistic tells us how many people over the age of 16 have jobs.
Take a look at the chart below…
I’m really not sure why the Fed seems so confused.
It’s pretty obvious that if the number of people working has decreased and the population has increased, the employment picture really isn’t all that good-looking. Perhaps the ways the unemployment rate and number of jobs created are calculated are wrong.
And perhaps if the jobs picture is as weak as the participation rate says it is, it’s no wonder wages aren’t rising like they should.
And that might explain why inflation is stubbornly low.
What’s there to be confused about?
Is the Fed really focused on jobs and inflation, as per its dual mandate? Have the trillions of dollars the Fed spent on quantitative easing and bailing out banks generated jobs, fueled economic growth, and inflated prices?
Or have its policies just propped up financial assets and bank profits?
I’ll let you come to your own conclusion.
And if you are interested in hearing more about the Fed and how you can profit from overreactions in the Treasury bond market, I’ll be speaking at our annual Irrational Economic Summit in October. I hope to see you there!
Editor, Treasury Profits Accelerator