Why the Fed Can't Figure Out the Jobs Market

As the Fed continues its fight against inflation, one of the more challenging parts of the economy is gauging what’s happening in the jobs market.

One July report showed the private sector added nearly 500,000 jobs, double the expectations. Meanwhile, another July report showed that job openings fell by 500,000, also above expectations.

In explaining why the Fed may boost interest rates again in 2023, Fed Chair Powell said, “What’s really driving it…is a very strong labor market.”¹

The accompanying chart shows why the Fed struggles to understand what’s happening with today’s jobs market.

As you can see, the number of self-employed people rose to an all-time high during COVID. But now it’s falling at a rapid pace. What’s causing the drop? More people appear to be returning to work at 9-5 jobs, perhaps fearful that the economy might collapse into a recession. When economic growth slows, perceptions may hold that 9-5 jobs seem more secure.

The Fed has several mandates, including managing the nation’s monetary policy to promote stable prices and maximum employment.

Sometimes, those two jobs can conflict. If you raise rates too high and economic growth slows in response, higher unemployment may be the outcome. Don’t raise rates enough, and inflation can raise prices. Add in the twist of how COVID influenced the jobs market, and you can see why the Fed may be scratching its head a bit with interest rates.

One of my favorite sayings is, “Don’t worry about the horse. Just load the wagon.” In this instance, perhaps a more accurate saying would be, “Don’t worry about the Fed. Just focus on the investment strategy we created.”