Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / The Fed's Silent Wage Squeeze
Transcript
- Lucas: If walking through the economy with us has made something click, you might want to support the show directly. We keep these episodes ad-free because listener contributions cover the production costs. If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it really does help keep the signal to noise ratio high. And speaking of signals, Lucas, the latest jobs data is sending some pretty mixed messages right now. Lucas: It is, and I think we need to look past the headline number of twenty-nine thousand jobs added in September. The real story here is the unemployment rate ticking up to four point two percent alongside a sharp deceleration in hiring. When you combine that with core inflation holding steady at three percent on the personal consumption expenditures gauge, you get a picture of an economy that is neither heating up nor cooling down fast enough. Luna: So the Fed is stuck in that middle zone where they can't cut aggressively because inflation is still above target, but they can't hold rates too high without risking more job losses. Lucas: Exactly. And there is a specific structural piece to this that often gets overlooked. Recent analysis points out that men are losing ground in the labor market faster than women. This isn't just a cyclical dip; it reflects deeper shifts in manufacturing and construction sectors that have been shrinking for years. When you lose jobs in those areas, you don't just get fewer workers; you get a mismatch in skills and geography that makes the remaining workforce less flexible. Luna: That sounds like a supply-side problem masquerading as a demand-side one. Does that change how the Fed should be thinking about interest rates? Lucas: It absolutely does. Traditional monetary policy works by dampening aggregate demand to lower wages and prices. But if your labor supply is contracting due to demographic or structural reasons, raising rates doesn't fix the shortage. It just raises the cost of borrowing for everyone else. We are seeing the effective federal funds rate sit at three point seven five percent, which is restrictive, but the transmission mechanism feels clogged. Luna: I see. So even though the ten-year Treasury yield is hovering around five point thirty-four percent, signaling that bond markets are pricing in higher long-term costs, the actual pressure on consumer spending might be coming from elsewhere. Lucas: Right. Let's look at the CPI print from August. The all-items index moved to three hundred thirty-four point one, but what matters more is the core measure excluding food and energy, which rose to three hundred thirty-seven point eight. That is still elevated relative to the pre-pandemic trend. The Fed wants to see that core number drift down toward two percent, but it's proving sticky. Luna: And with the FOMC meeting coming up soon, are traders expecting a pause, or are they betting on another move? Lucas: Most of the market is pricing in a wait and see approach. The softness in the September jobs report gives the Fed cover to pause. If they were to hike again now, with unemployment rising and hiring stalling, it would look like they are ignoring the damage their own policy is causing. But pausing also carries risk, because inflation hasn't collapsed. Luna: It feels like they are walking a tightrope. One misstep and they either reignite inflation or trigger a recession. Lucas: Precisely. And here is the thing about that tightrope: it's getting narrower. Look at the breakeven inflation rate on the ten-year Treasury. It's sitting at two point three six percent. That means investors expect inflation to run hotter than the Fed's two percent target over the next decade. If confidence erodes further, long-term rates could spike, which would crush housing affordability and corporate investment. Luna: That is a valid concern. But Lucas, do you think the demographic shift we talked about earlier—the loss of male workers in certain sectors—is actually driving wage pressures up, or is it keeping them down because there are fewer people competing for those remaining jobs? Lucas: It's keeping them down in the short term because the pool of available workers is shrinking, but it creates a perverse incentive for employers to automate or raise wages selectively for the few who remain. In sectors like healthcare and education, where labor is intensive, you are already seeing wage growth that is outpacing productivity. That is classic cost-push inflation, and interest rates are blunt instruments for fixing that. Luna: So the Fed might be fighting the last war. They are trying to cool down an overheated services sector while ignoring the structural bottlenecks in goods and labor supply. Lucas: I think that's a fair assessment. The services sector is still resilient, which keeps the core PCE price index elevated at one hundred thirty point five. Meanwhile, the goods sector has cooled significantly. But because services make up such a large portion of GDP, the overall inflation number stays stubbornly above target. Luna: It seems like the 'higher for longer' narrative is starting to fray. With the Dow flat and the Nasdaq up two point five percent over the last week, equities seem to be pricing in a softer landing. Lucas: Equities are optimistic, yes. The Russell twenty small-cap index is up one point six percent, which suggests some relief for smaller businesses that have been squeezed by high borrowing costs. But I wouldn't read too much into a five-day move. The broader market is still wary of the fiscal deficit and the potential for geopolitical shocks to oil prices. Luna: Oil prices are a wildcard, aren't they? Even if the Fed holds steady, a supply disruption could push energy costs up and derail their inflation fight. Lucas: Absolutely. And given that energy is excluded from the core measures the Fed watches most closely, a sudden spike in gas prices would hurt consumers without immediately moving the numbers the central bank uses to set policy. It's a disconnect between political reality and economic metrics. Luna: That brings us back to the silence of the Fed. They are communicating less, waiting for more data, and hoping the labor market continues to soften gradually. Lucas: Graceful disengagement is the goal, but grace requires precision. And right now, the data is noisy. Twenty-nine thousand jobs is not zero, but it's not strong either. It's a gray area where policy paralysis sets in. Luna: Do you think the Fed will surprise us with a cut in November if October's data comes in weak? Lucas: A surprise cut would be dramatic, but not impossible if the unemployment rate jumps above four point three percent. However, I think they prefer a series of small, predictable moves. Markets hate surprises, especially when it comes to money. Luna: Predictability is good for planning, but it doesn't solve the underlying structural issues we discussed. Lucas: No, it doesn't. And that's why I worry about the long-term trajectory. If we don't address the labor force participation gap, particularly among older men and those in declining industries, we risk stagflation-lite. Low growth, persistent inflation, and no easy policy fix. Luna: Stagflation-lite. That sounds like a recipe for political instability as well as economic pain. Lucas: It is. And history tells us that central banks are often blamed for both. The Fed is trying to navigate this with limited tools, relying on time and patience rather than decisive action. Luna: Patience is hard when your mortgage rate is tied to those ten-year yields and grocery bills are still climbing. Lucas: True. For the average listener, the macro nuances matter less than the fact that their purchasing power hasn't recovered fully. The Fed's mandate is price stability, but for families, it's about security. Luna: Security is what they're missing out on. If the labor market continues to contract, job security becomes the primary concern over wage growth. Lucas: Exactly. And that shift in sentiment—from wanting higher pay to wanting any job—changes the dynamic entirely. It reduces the bargaining power of workers, which should theoretically lower inflation, but only if employers choose to pass those savings on to consumers. Luna: Which they haven't been doing consistently. Margins have stayed high. Lucas: They have. Corporate America has been very good at protecting its bottom line. Until that changes, or until the Fed forces a reckoning through tighter financial conditions, we are going to see this tug of war continue. Luna: So, what's the takeaway for someone listening who is trying to make financial decisions right now? Lucas: Don't bet against the Fed's patience, but don't assume they have all the answers. Diversify your exposure to fixed income, given the yield curve dynamics, and keep an eye on sectors that are less sensitive to interest rates. Luna: Practical advice. Stay liquid, stay diversified, and hope for the best. Lucas: Hope for the best, plan for the worst. The economy is transitioning, and transitions are always messy. The question is whether we end up in a new equilibrium or a prolonged stagnation. Luna: One way or another, the Fed will be watching closely. We'll see what they do next. Lucas: We will. And I suspect the answer won't be as clear as we'd like it to be.