DANIEL VAUGHAN: From jobs reports to Congress, Democrats deliver bad news

If a well-developed economy like the United States has a month where it generates more than half a million new jobs, that would usually get greeted as good news. But we’re not in an ordinary moment. With inflation running rampant and recession lurking, we face the ironic position that good economic numbers are bad for the economy.

The US Bureau of Labor Statistics (BLS) reported that the American economy created an astonishing 528,000 jobs in July this past week. CNBC noted that “the unemployment rate was 3.5%, easily topping the Dow Jones estimates of 258,000 and 3.6%, respectively. The unemployment rate is now back to its pre-pandemic level and tied for the lowest since 1969, though the rate for Blacks rose 0.2 percentage point to 6%.”

That topline number blew expectations out of the water. Markets immediately dipped because news like that, where the jobs market is scorching hot, is terrible news. Markets expected a much lower number because they’re hoping the Federal Reserve will slow down interest rate hikes.

Good news is bad news.

Mohamed El-Erian, University of Cambridge Queens’ College president and Bloomberg Opinion columnist, said in an interview that the report was bad in every single way for the Federal Reserve. You see, for the Fed, their goal since starting the interest rate hikes has been to increase unemployment to combat inflation. The belief is that if they slow job creation, that will decrease wage hikes and, in turn, slow down economic demand.

To slow down inflation, the Fed wants to cause people to purchase fewer things, reducing demand in the economy. As a result, the Fed has declared it wants rising unemployment rate goals to slow inflation.

But the August jobs report obliterated any notion that the Federal Reserve is making progress. The jobs market is running red hot, and there’s little evidence the Fed should slow down rate hikes. Fed Chairman Jerome Powell suggested that perhaps interest rates were at a neutral place, allowing more flexibility to the Federal Reserve in its decision-making.

Mohamed El-Erian called that notion “comical.” Former Treasury Secretary Lawrence Summers was blunter, saying the Fed was engaged in “wishful thinking,” and “Jay Powell said things that, to be blunt, were analytically indefensible … There is no conceivable way that a 2.5% interest rate, in an economy inflating like this, is anywhere near neutral.”

Rate hikes to continue.

The only rational response remaining for the Federal Reserve is to continue the path of hawkish inflation policy, which means more rate hikes. At this rate, the only event that could make the economy achieve the Federal Reserve’s policy goal is a recession. The Fed wants slower growth and job losses – not an expanding job market.

Not everything in the jobs report was all roses, however.

A CNBC report noted that “a jump in the number of workers in part-time positions for economic reasons — usually because of reduced hours, poor business conditions or because they can’t find full-time work — hints at potential instability ahead. The Bureau of Labor Statistics on Friday reported the number of such workers, called “involuntary part-time workers,” increased by a seasonally adjusted 303,000 in July, to 3.9 million.”

They added that “The July uptick wasn’t due to a lack of full-time jobs. … Instead, the report said, workers were forced into part-time roles because of reduced hours and unfavorable business conditions. The report indicates a move in the ‘wrong direction,’ according to Julia Pollak, chief economist for ZipRecruiter, and could signal a recession ahead.”

Democrats add to the pain.

Additionally, Democrats look ready to get their Inflation Reduction Act, renamed from the Build Back Better legislation, signed into law by Joe Biden. Axios called it a “$740 billion tax, climate and health care reconciliation package.”

Dumping hundreds of billions of new spending onto an already on-fire economy with inflation raging will not help bring down pricing pressures. Democrats aim to increase demand across various areas while claiming demand is not impacted. 

Further, Democrats are pushing Joe Biden to forgive student loan debt ahead of the midterms. If they achieve that, such a measure, if timed to be in effect for the midterms, would have the desired electoral impact without being challengeable by law while elections take place. It doesn’t matter to the left that forgiving student loans would unquestionably increase inflationary pressures; all that matters is an electoral win.

No way out for the Fed.

The media will pitch the Inflation Reduction Act, any student loan forgiveness, and the hot jobs reports as all wins for the Biden White House ahead of the midterms. But these “wins” are all bad news for the economy from the Federal Reserve. Anything that supports a strengthening inflation storm means more pain for the American economy ahead.

The Fed was hoping that things were slowing down on the inflation front. And it’s likely the next CPI print will be lower than before. But the underlying fundamentals are the same: the Fed hasn’t brought us to peak inflation; problems persist. The Fed will have to increase interest rates to keep up with the “good news” Democrats are trying to deliver.

No one in the White House understands the relationship between their actions and inflation. Or, if they do recognize that symbiosis, they lie to the press about it. The Federal Reserve does understand this problem. The Fed’s policy options shrink seemingly by the hour.

That means more pain for people like you and me.