Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Cares About Job Satisfaction
Transcript
- Lucas: So there's a new Gallup survey out this week that found something I genuinely did not expect: seventy percent of American workers say they 'really love' their jobs. That is the highest reading since Gallup first asked the question back in 2001. Luna: Seventy percent? That feels high. I would've guessed, I don't know, maybe fifty, especially after all the headlines about quiet quitting and the great resignation. Lucas: Right, and that's exactly why it caught my attention. The narrative for the last few years has been about worker disillusionment, but the data tells a different story. And here's why it matters for this show: the Federal Reserve is obsessed with the labor market right now. Core PCE came in at 3.4 percent in May, the highest since October 2023. The Fed is trying to figure out how much slack is left, and whether wage pressure is going to keep inflation elevated. Luna: So does a happy workforce mean more wage pressure or less? I can see arguments both ways. Lucas: Exactly. Let's unpack both. On one hand, if workers really love their jobs, they might be less likely to quit and demand a raise. The quits rate has actually been trending down — it's around 2.1 percent now, down from the peak near 3 percent in 2022. So maybe the 'great resignation' is truly over, and that reduces a source of wage inflation. Luna: But on the other hand, if workers are happy, they might also feel more confident asking for more money. And if employers are desperate to keep them, they might give in. Lucas: That's the concern the Fed has. Wage growth is still running around 4 to 5 percent annually, depending on which measure you use. That's above what most economists think is consistent with 2 percent inflation. The Atlanta Fed's wage tracker is at 4.8 percent. If job satisfaction is a proxy for labor market tightness, then the Fed might see this as a signal that the economy is still running hot. Luna: But how much weight should they put on a sentiment survey versus hard data like payrolls and the quits rate? Lucas: That's the million-dollar question. The Fed's models don't really have a variable for 'job satisfaction.' They look at the unemployment rate, the quits rate, wage growth, and the Beveridge curve. But I think this Gallup number is interesting because it captures something those other indicators miss: the worker's subjective experience. If people feel secure and valued, they might behave differently than the quits rate alone would suggest. Luna: So the Fed should be paying attention to this? Or is it just a quirky data point? Lucas: I think it's worth watching. Here's why: the Fed's estimate of the neutral rate of interest — the rate that neither stimulates nor restrains the economy — has been creeping up. Some FOMC participants now see the neutral rate as high as 3.5 percent. If the labor market is genuinely as strong as this survey suggests, then maybe the neutral rate really is higher, and the Fed doesn't need to cut as aggressively. Luna: But isn't there a risk that the Fed overreacts to a single survey? One poll doesn't make a trend. Lucas: Fair point. Gallup has only been asking this question since 2001, so we don't have a long history. And the previous peak was 65 percent in 2005, right before the housing bubble. So maybe it's a coincident indicator of an overheated economy. But I think the more important takeaway is that the Fed needs to stay humble about reading the labor market. The data is messy. Luna: And speaking of messy, the Core PCE number itself — 3.4 percent — is still well above the Fed's 2 percent target. Are we any closer to understanding why inflation is sticking? Lucas: The Fed has been scratching its head over that. A lot of the stickiness is in services, especially housing and medical care. But there's also this phenomenon of 'supercore' inflation — services excluding housing and energy — which has been stubbornly high. The Fed's own forecasts have been off. They predicted core PCE would be at 2.8 percent by now. Instead, it's gone the other way. Luna: So if the Fed can't forecast inflation accurately, how much confidence should we have in their rate path? Lucas: Well, the dot plot from June showed the median FOMC member expects one rate cut this year, likely in the fourth quarter. But given the data we're seeing, I'm not sure that's locked in. If core PCE stays at 3.4 percent or goes higher, they might hold steady. The fed funds rate is at 3.63 percent now, which is still restrictive in real terms, but maybe not as restrictive as they think if the neutral rate is higher. Luna: So back to the job satisfaction survey — if workers are happy and spending, doesn't that feed into demand-pull inflation? The Fed would have to keep rates higher to cool that off. Lucas: That's the worry. Consumer confidence has been relatively resilient, and if people are happy in their jobs, they're more likely to spend. The retail sales data has been decent. So the Fed is in a tough spot: they want to avoid a recession, but they also need to bring inflation down. And a happy labor market might actually be working against them. Luna: It's almost ironic — good news for workers is bad news for the Fed's inflation fight. Lucas: Exactly. And that tension is why I think this Gallup number is worth talking about. It's not going to move markets, but it might influence how some FOMC members think about the labor market's contribution to inflation. If they start to believe that workers are more empowered than the raw data suggests, they might lean hawkish. Luna: You know, it reminds me of something you said a few episodes ago: that the Fed is data-dependent, but the data is always subject to interpretation. Lucas: Right. And surveys like this one are part of the interpretation. They add color to the black and white numbers. And since we're on the topic of interpretation — we should mention that we do this show without any ads. We keep it independent because we think that makes the analysis more straightforward. If you find value in that, you can support us at buy me a coffee dot com slash fexingo. It helps us keep doing what we do, without any sponsors to answer to. Luna: Yeah, it's a small way to keep the podcast ad-free and focused on what matters. We appreciate everyone who's contributed already. Lucas: Alright, back to the labor market. So we have this high job satisfaction reading, but there's also the other side: what about workers who aren't satisfied? The survey still shows 30 percent who don't love their jobs. That's a big number too. Luna: And those workers might be more likely to quit or agitate for change. So maybe the aggregate picture is more mixed than the headline suggests. Lucas: Exactly. The quits rate has stabilized, but it's still above pre-pandemic levels. And we're seeing union activity pick up, especially in sectors like auto and healthcare. So there's a bifurcation: some workers are very happy, others are pushing for more. That could lead to uneven wage pressure across industries. Luna: And the Fed can't target wages by sector. They have to set one rate for the whole economy. Lucas: Right, that's the challenge. If wage growth is high in some sectors but not others, the overall number might look moderate, but the Fed worries about the high-growth sectors spilling over. And with services inflation still sticky, they can't afford to ignore it. Luna: So what's the bottom line? Should the Fed be more or less inclined to cut rates based on this survey? Lucas: I don't think this survey alone moves the needle. But it adds to the case that the labor market is still tight. If you combine it with the Core PCE number, the quits rate, and wage growth, the picture is one of persistent pressure. I think the Fed will hold steady at the July meeting and wait for more data. The September meeting could be more interesting if inflation shows signs of easing. Luna: And if it doesn't? Then we could be looking at no cuts this year. Lucas: Possible. The market is currently pricing in one cut by December, but that could change quickly. The next CPI report is due in mid-July, and that will be a big data point. If core CPI stays elevated, the hawks on the FOMC will have more ammunition. Luna: So the job satisfaction survey is a reminder that the economy is more than just numbers. It's about how people feel. Lucas: Exactly. And the Fed, for all its models, has to grapple with that human element. It's what makes monetary policy both fascinating and incredibly difficult.