Don’t be fooled by the jobs report, the Federal Reserve isn’t hiking interest rates any time soon

fed chair jerome powell
Federal Reserve Chair Jerome Powell prepares to speak during a House Financial Services Committee hearing on Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response in the Rayburn House Office Building on December 2, 2020 in Washington, DC.

  • The jobs report was strong, but the US economy has a long way to go to bounce back from the COVID crisis.
  • This means the Federal Reserve isn’t going to ease up on its crisis measures anytime soon, and it certainly won’t raise interest rates.
  • Just listen to Fed Chairman Jerome Powell, he’s going to let the job market run hot. 
  • George Pearkes is the global macro strategist for Bespoke Investment Group.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit the Business section of Insider for more stories.

Today’s jobs report from the Bureau of Labor Statistics was good news for the US economy, with businesses reporting 349,000 jobs added in February. But that good news, while welcome, is unlikely to mean anything for Federal Reserve policymakers, who have bigger plans for the labor market than a few strong jobs report numbers.

In a Q&A with the Wall Street Journal yesterday, Fed Chair Jerome Powell outlined the central bank’s areas of focus for the economy. In keeping with the changes to their long-term goals updated last year, the Fed’s labor market target is now “maximum employment”, which officials admit is “a broad-based and inclusive goal that is not directly measurable.” 

Instead of focusing on a single number like the unemployment rate or attempting to keep employment at a level that doesn’t create a risk of inflation, this approach admits that the relationship between inflation and labor markets has broken down in recent decades. So instead of obsessing over inflation and individual labor market numbers, the Fed now hopes to create conditions where jobs are plentiful for all who want them.

Recent experience suggests this is the correct approach. In the pre-COVID economic peak, 80.5% of Americans in their prime working years (25 to 54) had jobs, the highest since 2001 but well short of the record 81.9% from April of 2000. Despite that very broad labor market success, core inflation only rose 1.6% in 2019, illustrating that running labor markets hot was not causing inflation to soar.

This experience – a strong labor market with little inflation – should influence the Fed’s thinking going forward, especially when it comes to the emergency measures put in place to deal with the COVID crisis.

As the economy continues  to recover from COVID, markets have begun to assume that the Fed is going to start to roll back some of these crisis measures over the next year or so. Some investors and Fed watchers believe quantitative easing (purchases of Treasury debt and mortgage-backed securities guaranteed by the federal government) may be “tapered” this year or early in 2022. Interest rate hikes are also, in the view of these market participants, likely to follow. Markets point to investors assuming rates will not be raised this year but some pricing of potential hikes is creeping into the 2022 calendar year and multiple interest rate hikes are fully priced in 2023.

This speculation – both about QE easing and the potential for rate hikes in the next couple of years – is inconsistent with the guidance the Federal Reserve has offered. 

In yesterday’s Q&A, Powell said it was “highly unlikely” that maximum employment would be achieved this year, even though there is “good reason to expect job creation to pick up.” To illustrate why strong jobs growth doesn’t mean the Fed needs to tighten, the chart below shows the prime-age employment/population ratio. As it stands, in order to achieve the same level of employment as pre-pandemic, prime age workers economy would need another 5.04 million jobs.

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Maximum employment likely means a prime-age employment-population ratio well above the prior cycle highs, so the shortfall is even more than that 5.04 million jobs. For context, the solid February jobs report would need to be repeated every month for 14 months to get this ratio at or above its old peak, assuming every new job went just to this category. At the 154,000 pace of job creation for 25-54 year olds only, maximum employment is 33 months away.

This is just one example of how long the hole US labor markets are in will take to climb out of, but interest rate markets are pricing almost four 25 basis point hikes by the Federal Reserve by the end of 2023…which is 33 months away.

Only one thing can be true: either the interest rate markets are wrong, or the Fed is wrong in its commitment to returning the US to maximum employment. If you take the FOMC at its word, job creation numbers this year are almost irrelevant, even if they follow the solid pace set by February’s numbers. What’s really important is the distance to maximum employment, and that remains huge, leaving interest rate speculators only one out if they’re to be proven correct about the path of Federal Reserve policy.

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3 ways the US can improve COVID contact tracing efforts and encourage honest participation

A person gets a temperature check before entering an Apple store on June 22, 2020 in the Brooklyn Borough of New York City.
The US has a poor success rate when it comes to contact tracing coronavirus infections thus far.

  • The US has notably been unsuccessful in using contact tracing to reduce COVID-19 outbreaks.
  • A recent study suggests that more than 40% of people would not speak to public health officials when contacted.
  • Kellogg School clinical professor, Sarit Markovich, says that to get people to participate in contract tracing, there needs to be a level of trust.
  • Visit the Business section of Insider for more stories.

As COVID cases surged across the US last December, the CDC reckoned with a stark truth: Contact tracing couldn’t be scaled up to match the virus’ spread.

The practice of contact tracing – or identifying, assessing, and managing people who have been exposed to a disease – is an essential tool for controlling outbreaks by interrupting a disease’s transmission chains. And indeed, combined with lockdowns and mask ordinances, some countries have had great success using contact tracing to reduce outbreaks.

So why have attempts to institute it failed in so many other countries, most notably the US? And given that COVID is likely to be with us in some form for quite a while, are there ways to make contact tracing more effective here?

Sarit Markovich, a clinical professor of strategy at the Kellogg School, says that contact tracing, at its core, hinges on trust. This means that trust will need to be at the foundation of any successful efforts moving forward. This includes building trust in the technology, specifically in terms of false positives, trust that information will be kept private, and trust that people will not suffer consequences for self-reporting.

Here, she offers her thoughts on where contact tracing can fail, and how to do it better.

Consider your social makeup

Contact tracing requires individuals to share private information in service to the public good. In considering how to solicit this information, it helps to understand the difference between centralized and decentralized societies, Markovich said.

In countries with centralized governments, like China or Singapore, contact tracing is mandated and compliance is universal. Governments track people’s movement through a national phone app or wearable tokens, which people scan as they move between locations. Noncompliance is heavily fined. In general, these societies prioritize collective welfare over individual freedoms, like privacy.

“If the government makes you do it, you do it,” Markovich summarized. “And now in many of those places, people are back to their offices and normal life.”

But in democratic societies where government is decentralized, individual rights can be in tension with public health, Markovich said. Strategies that are effective in centralized societies are less likely to work in decentralized ones.

In Israel, for example, the government-mandated digital contact tracing and levied hefty fines for noncompliance. Given the country’s population size and relative homogeneity, it seemed as if national contact tracing would work much like it did in Singapore, Markovich said. But people objected to being tracked. They turned off or left their phones at home, and the initiatives have been unsuccessful.

“In decentralized societies, people do not completely trust the technology and do not completely trust authorities knowing where they are,” Markovich said. “They want privacy.”

Lower-tech approaches, where public health workers individually interview exposed individuals about their contacts, are unfortunately no more promising.

In Israel, for example, a volunteer-led startup tried to launch in-person contact tracing as an alternative to the government’s digital model. The initiative stalled when it turned out residents did not want to share personal information with strangers. That same skepticism exists in the US, where 41% of people in a recent Pew survey said that they wouldn’t speak to a public health official who contacted them by phone or text.

“The goal is to make people get used to contact tracing in a context that’s not scary and in a way where its effect on others is not negative but positive,” she said.

Keep it local

For now, Markovich believes that in decentralized societies, national contact tracing initiatives won’t work. A better option: hand the lead over to local governments and organizations.

At this smaller scale, Markovich says contact tracing becomes easier to centralize. Initiatives can be heavily encouraged or even mandated, and enforcement is also easier when it is tied to the social pressures of local communities or the requests of employers.

“Organizations and municipalities have an advantage because there’s more trust involved,” Markovich said. “They can centralize and mandate it, because if you want to be part of an organization – an employee at your company, for example – there are rules you will have to comply with.”

Over time, Markovich believes that the number of organizations and communities that mandate contact tracing will grow, especially as more local models – a church, a factory, or a city whose leaders have established trust – start to show success.

Reward disclosure without punishing exposure

She also advises that local communities and organizations think carefully about how to encourage people to disclose their contacts. This means, first and foremost, minimizing the negative consequences on all parties: those who have tested positive and are disclosing their contacts, as well as the individuals whom they have exposed.

Here, technology has a powerful role to play. Markovich observes that in some communities, COVID-positive people are blamed for spreading the virus. This practice of “COVID-shaming” could make them less likely to self-report their contacts.

“This is where technology helps,” Markovich said. “You want to use technology rather than rely on people to tell you who they’ve been in contact with or that they’re sick. It’s not about self-reporting. The technology tells you.”

But despite the benefits of technology that can automatically notify people of exposure (see sidebar), Markovich also notes that the human element shouldn’t be ignored. Follow up calls from trained professionals will provide an opportunity for people to ask questions about next steps, express concerns, and learn how to self-isolate, if required.

“The human part is important,” Markovich said. “Technology is great in terms of detection speed, but human contact creates trust.”

And whatever the technology used, if people do have to quarantine because they’ve been exposed to COVID, employers should assure their employees that they will be compensated for the time they self-isolate. Markovich cites incidents in which employees who have been exposed to the virus went to work because they lacked paid sick leave or feared losing their job. Since some sectors are at higher risk for infection, like grocery stores, the government should share these costs with organizations.

“We need incentives to encourage people to tell the truth and feel comfortable staying home,” Markovich said. “If you know that you’re going to be compensated even if you’re home, then you’re definitely going to feel more comfortable self-reporting and self-isolating.”

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