I understand why increasing interest rates can negatively affect the economy, but why would the Feds raise the rate because of the positive jobs report?
I always assumed that more people employed means more discretionary spending leading to more corporate profits.
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Theres something called the natural rate of unemployment, which occurs when recessionary pressures and inflationary pressures are balanced.
But when the unemployment is lower than the natural rate, that means the nation is experiencing inflationary pressures, with cash flowing around the economy but not actual value flowing.
To make sure this doesn’t aggravate or create long-term inflation, the Fed raises rates, lowering purchasing power and the ability for firms to higher more employees.
I dom’t think that the jobs report is a significant factor in central bank decisions, because employment is a lagging indicator. Trying to fine tune an economy based on slow-to-come data like employment means that banks can be grossly wrong in their corrections to cool or heat up the economy.
Inflation is a leading indicator. Central banks usually give much more weight to inflation for that reason. That’s why many central banks have an inflation target rather than an unemployment target,
When people say “the economy” they tend to be referring to lots of different things.
“How is my job(satisfation, and pay) ? Do I feel confident that I will have a job in the future?”
“How is my neighbor (community) doing? What about his/her/their future?”
“How are my investments (the stock market, ussuallt) doing?”
“Is GDP Growing?”
“Is REAL (inflation adjusted) GDP growing?”
Raising rated will tend to lower business investment, which will tend to make fewer people have jobs, and tend to make GDP go down.
But if jobs are being added that are inefficient — that might be good for the economy, overall.
And what the stock market does, and what GDP/Real GDP/Real GDP per Capita do, are all kinda different.
The FED is tasked with trying to get the economy to grow at its highest sustainable rate. No-one knows EXACTLY what level is sustainable. Historically, economies with overall unemployment below 4 TEND to follow that up with high inflation AND THEN A CRASH.
The fed is looking at lots of indicatorsx and many of them are doing some of the things they do right before the economy gets overhot, followed with a crash.
One of those indicators is the employment rate. The fed sees it dropping, and are trying to avoid a crash, later.
So stong employment numbers on their own are probably a good economic indicator.
Coupled with high inflation, that is often followed with a hard crash.
We are in this weird zone of what is historically high inflation, but it seems to be coming down. But, historically, high inflation, coupled with very low unemployment has been a strong signal of an overhot economy, which will crash hard, in a year or two. So do you pay more attention to “historically high inflation” or “inflation coming down”? Coulle that with “unemployment levels lower than we have seen in 70 years”…
It isnt that strong employment numbers are BAD, but combined with other economic indicators, they MIGHT mean an overheating economy, that will soon crash.
Low unemployment means higher labor costs for companies, more discretionary spending also creates pressure on demand that keeps inflation higher.
First off – economics can be very counterintuitive, and also very complicated. What’s good for the goose isn’t always good for the gander, so to speak.
Many economists consider an “ideal” state of the US economy to have an unemployment rate of about 5%. That means that there is a pool of people looking for jobs, and a pool of people that a company can turn to if they need to hire and expand.
If the unemployment rate is below that, if a company wants to hire someone, they likely have to try to entice someone who works for another company to quit and come join their company. Doing that means offering a higher salary. Doing that puts pressure on companies to increase the salaries of existing workers so they are content or don’t quit.
This increase in wages means there is more discretionary money in the economy “chasing” the same amount of goods and services, which leads to inflation.
The Federal Reserve has two primary missions – low inflation and high employment, or rather price stability and maximum employment. The two very often are at odds with one another, and getting the economy into a “balanced” state is what they strive for.
In times of high unemployment they slash interest rates so it’s cheaper to borrow money to expand businesses and buy cars and houses so that more people can get jobs. In times of high inflation and low unemployment they hike interest rates so that people spend less, and companies can’t expand and may even start laying people off and people buy less cars and houses, etc. This increases the unemployment, which under some models will bring down inflation.
Yes, everyone likes the idea of “everyone” having a job. In reality it can cause the economy to “overheat” and drive prices up.
“A good economy” is one where we sort of see-saw between a few states constantly. The states go in a cycle:
* People have money to spend and spend it buying things. There are enough things for what everybody wants so they buy a little extra.
* There are not enough things to buy so people start offering to pay more.
* The extra money is used to make more stuff.
* Eventually there is more stuff than people need so they stop buying so much so places quit making so much.
Basically: we hope that we produce a lot of stuff, then the people who were paid to make stuff buy stuff, then buying stuff creates shortages that cause companies to invest money in making more stuff. If the “balance” is perfect, the cost of things doesn’t go up very much because every time it does, the people making stuff get paid a little more to make more stuff.
So actually for the above to work, we can’t always have 100% of available workers employed. That would mean when we need to make more stuff, we can’t find “free” workers who would like a new job. So we have to try to offer more money to get workers to leave other places, which means things have to cost more.
If a decent amount of people are unemployed, they won’t necessarily need a higher wage to want to take on a job. That makes it easier to make more stuff without having to raise costs.
Of course, it can go the other way. If TOO MANY people are unemployed, people don’t have money to buy stuff so there’s no demand, which means companies won’t be looking to hire people to make stuff. Worse, even if they want to make stuff, since so many people want jobs there isn’t an incentive to offer even the current wage: companies might try to cut wages.
So we’re never really in a “good” state for very long. The current state of unemployment and spending makes companies react. That affects next month’s state of unemployment and spending, which causes new reactions. It’s not always as simple as supply and demand because you can be in states like “high debt” where even if you raise employment and wages people aren’t *spending* the money they make so it doesn’t help the economy. Or you can have “high employment but low wages” so nobody can buy the things they’re making. There are lots of little problems that are really hard to solve because anything you change affects everything else.
So right now, the people who think high employment is bad believe the reason we have so much inflation is the average American has too much money. They believe this caused people to accept higher prices for goods which drives inflation. They worry so many Americans are taking out investment loans we have to put a stop to it. So they think the best way to put America back on course is to raise unemployment, keep wages steady, and ideally increase the average American’s reliance on debt for survival so they’ll be less picky about wages and other benefits.
> positive jobs report
Positive for who?
If I’m an employer looking for workers a “positive jobs report” is not at all positive for me. It means I’ll have a harder time hiring people and have to pay my employees more money to get them to stay with me. So as someone who’s shopping for workers, a low unemployment rate is bad for me.
You’re right that more people having money can lead to higher business revenues. But they are mostly offset by the higher expenses of having to hire people at a higher rate of pay.
Broadly, you can measure how well the “Economy is doing” in part, by looking at jobs: the employment rate is down and lots of people is working, that’s a sign that the economy is doing well.
But, the fed isn’t only concerned with the economy — right now, the fed’s goal is to reduce inflation, which it does by raising interest rates. And, when the economy stats to perform “too well,” inflation starts to increase — when people have more money to spend, the prices of goods and services tend to go up.
So, the feds will try to combat that by raising interest rates. When interest rates go up, businesses and people respond by buying less things on credit, and that tends to reduce demand for goods and services, which tends to push prices down.
So, what you’re seeing is this:
(a) positive jobs report
(b) people saying “Oh no, the fed is going to increase interest rates. That means the companies I invest in won’t make as much money. And, that means those companies are worth less.”
(c) as a result, the stock market goes down
The Feds have what is known as a “dual mandate” – it has two things it is tasked with accomplishing in order to regulate the economy. These two things are:
1. Maximizing employment
2. Keeping inflation at 2%
The US has been experiencing inflation far exceeding that 2% target for the past few years. In response, the Fed has raised interest rates, with the intention that these increases will make the money supply more limited, and therefore, bring inflation back down to their target. Attempting to slow the economy by making money harder to get is, naturally, not ideal for business growth. So for most businesses, these conditions make it harder to grow, invest, and profit. Generally the stock market (i.e. Wallstreet) really doesn’t like this, as high interest rates really cramp their style of easy money.
One thing you’d also expect to see with these conditions is an increase in unemployment – rougher conditions for business generally means there will be less jobs to go around. But this hasn’t happened – in fact, the US economy keeps adding jobs! Great, right? Well… not exactly, because the economy is still “too hot” and inflation is still high. High inflation and low unemployment means the Fed will continue to raise rates until one of these things changes. So most people think that the most likely reason for the Feds to stop raising interest rates (and maybe even decrease them again) is for the US economy to stop making so many jobs and start losing some. In other words: a recession.
So often you’ll see the stock market fall when a really good jobs report comes out – it means that the most important companies in the stock market indices will have less access to easy money because the Fed is expected to increase rates even more.
If the economy is doing too well, it causes inflation.
The Fed raises rates to cool inflation.
If Jobs reports show good numbers, it means the economy is not cooling fast enough.
(A side note: inflation is already cooling, but it takes time for rate increases to actually have the effect they want. The Fed is looking in the rear view mirror with lagging data like Shelter for example, so they arent thinking in present day terms. I dont think they will be happy until they cause a recession).
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