Federal Reserve is forcing Wall Street forecasters to pay attention to black unemployment
Instead of general measures – like aggregate employment and wage growth – the focus is on groups that tend to take the longest time to regain lost ground.
This signifies a prominent place on the Powell dashboard for metrics like the unemployment rate of blacks, wage growth for low-income workers, and the labor force participation of Americans with no college education.
These gauges indicate that there is still a long way to go. And if investors absorb this message, it will help bolster the economic support provided by the Fed’s easy going policies.
Employers added 916,000 Americans to their payrolls in March, in the first of what is expected to be a string of big hiring months as the United States rolls out vaccines and service industries reopen. Unemployment fell to 6%, down from a peak near 15% last April.
But the black unemployment rate was 9.6% – still above where it was as recently as January – and the labor force participation of high school graduates without a college education remained near lowest levels. lowest in decades, at 54.9%.
Average annual wage growth for the poorest 25% of wage earners was 4.2% in February (March figures are not yet released), down from 4.7% just before the pandemic, when low-income jobs posted their largest relative wage increases since the late 1990s.
Fed officials have highlighted variables like these while remaining vague on exactly how they would play into a possible decision on when to raise interest rates. Fed watchers will inevitably insist on clarity as the first hike – which policymakers don’t currently expect until the end of 2023 – draws near.
But some Wall Street analysts are not waiting for advice from the Fed.
In a recent report, economists at Goldman Sachs attempted to quantify the impact of the new inclusive employment framework on monetary policy. Banks typically do monthly forecasts for overall unemployment and labor force participation, but Goldman’s team led by Joseph Briggs took the new step of writing a forecast for the black unemployment rate as well.
While the overall unemployment rate is expected to drop to 4% this year and to 3.5% by the end of 2022, black unemployment is unlikely to drop to its pre-pandemic low of 5.2% before. the second half of 2023, and will still be above 4% by the end of 2024, they said. The forecasts were based on historical statistical relationships.
If this more granular type of forecasting materializes, it could impact the predicted variables. This is because monetary policy is a kind of public-private partnership.
The Fed controls short-term interest rates. But it does allow investors to set long-term rates, which central bankers generally consider more important because they determine the cost of mortgages or car loans. Thus, investor clarity on how the Fed will implement its new framework tomorrow is a crucial determinant of financial conditions today.
Right now, the Fed-markets partnership is offering lower interest rates than at comparable times during the last rally.
Yields on 10-year Treasuries have climbed to around 1.7% this year after Democrats took control of the Senate, which paved the way for additional budget support to accelerate the recovery.
Yet yields remain well below the 2.5% level of September 2014, when the US unemployment rate first fell below 6% after the financial crisis – or the return of 2.3%. in July 2015 when black unemployment first reached today’s figure.
In addition to shaping financial conditions, Powell’s new dashboard could help steer economic research towards key social issues.
Billions of dollars depend on the Fed’s interest rate movements, which are among the most watched events in the financial world. If investors demand forecasts of black unemployment or wages among low wages – because these are key factors for rate decisions – it could prompt further analysis of the reasons for these labor gaps. work exist in the first place.
But so far the Fed has been hesitant to make its own forecasts.
At a March 17 press conference, Powell said Fed officials paid close attention to these variables but did not consider releasing projections about them because “it would not be practical” to do so. .
Fed staff economists, who set the stage for discussions at policy meetings, also typically do not incorporate forecasts for such indicators into their work.
So, for now, Wall Street still has a wide range of outcomes to consider – both for how the economic recovery will progress and for the reaction of the central bank.
Goldman economists predict that the Fed will start raising rates in the first half of 2024, once the overall unemployment rate drops to 3.2%.
But even then, there is a “more than 20% chance that the black unemployment rate will still be above its last low of 5.2% and more than 90% chance” that it will be higher. at 4%, they wrote. “Some FOMC members may see this as a reason to wait for further improvements before tightening.
And according to Goldman, if the Fed decides to adopt a June 2020 proposal – from Jared Bernstein, now a member of President Joe Biden’s Council of Economic Advisers, and Janelle Jones, now chief economist at the Department of Labor – to target the Black unemployment unemployment rate instead of overall unemployment, which could delay the take-off of interest rates until 2025.