By Paul Krugman / The New York Times
Pull up, pull up!
Friday morning’s employment report was highly anticipated; many people thought it would make the difference between a quarter-point and a half-point interest rate cut at the Federal Reserve’s next meeting.
In the event, the report was meh; a soft but not disastrous reading on employment but no further rise in unemployment. In themselves, these numbers pretty much let economic analysts believe whatever they want to believe.
But the August report was only one of five major releases since last Friday, and the combined message of these reports was: Cut, cut, cut, cut, cut.
Last Friday we got the latest numbers on the Fed’s preferred measure of inflation. It’s running slightly above 2 percent, the target rate, but we know that this small overshoot largely reflects measured housing costs, which are a lagging indicator.
On Wednesday we got two reports. One, on job openings, showed a labor market that is continuing to weaken and is now a bit looser than it was before the pandemic. The other was the Beige Book, an informal survey by regional Federal Reserve banks, which showed a weakening economy with low inflation.
And on Thursday we got data on productivity and unit labor costs. Labor costs tend to be the stickiest, hardest-to-cure piece of inflation, but they’re up only 0.4 percent over the past year, thanks to muted wage growth and high productivity growth.
Put these five reports together, and they tell us two things.
First, we’ve won the war on inflation; and we did it without a recession or a large rise in unemployment. The pessimists and prophets of stagflation were completely wrong.
Second, the Biden boom — and yes, it was a boom, with remarkable growth in both gross domestic product and employment — is losing steam. Things had to level off eventually, but the deceleration is striking. The Fed has been trying to steer between two risks: the risk of cutting too fast and reigniting inflation, and the risk of cutting too slowly and allowing the economy to slide into recession. Well, the balance of risks has clearly shifted: There’s now much more danger of doing too little than of doing too much.
So the Fed should do the full half-point cut. We’ve achieved our soft landing; don’t ruin it by moving too slowly to pull the plane’s nose up.
This article originally appeared in The New York Times, c.2024.
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