Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Is Watching Nevada Job Growth
Transcript
- Lucas: So there's a headline that caught my eye this week, and it's not about the Fed's first meeting with Kevin Warsh or the Bank of England holding rates. It's about Nevada. Luna: Nevada? As in, the state with Las Vegas and not much else economically? Lucas: Exactly. CNBC ran a piece Friday — 'Struggling to find a job? Try looking in Nevada.' And it got me thinking about how the Fed reads labor markets. The FOMC looks at national aggregates: the unemployment rate, the JOLTS openings, the payrolls number. But those averages hide enormous variation. Luna: Right, because if you're in Nevada and hiring is hot, but you're in, say, New York and it's not, the national number smooths it out. Lucas: Precisely. And the Fed's models are built on those smooth numbers. So the question I want to ask today is: should the Fed care about state-level labor market divergence? And if so, what does Nevada tell us that the national data doesn't? Luna: Alright, I'm in. So what's actually happening in Nevada? Lucas: Well, the state has recovered faster than almost any other from the pandemic-era crash. Las Vegas tourism came roaring back, but the real story is construction. There's a massive building boom — data centers, warehouses, residential — driven by the influx of tech and logistics companies. And that's pulling up wages not just in construction but in adjacent services: restaurants, retail, cleaners. Luna: So it's a multiplier effect. And from the Fed's perspective, that could feed into services inflation, which is the stickiest component of core CPI. Lucas: Exactly. And look at core CPI: it was 336.1 in May, up from 335.42. Still running hot. The Fed's preferred measure is core PCE, but CPI is what people feel. If Nevada's wage growth is running at, say, 6 percent while the national average is 4, that puts upward pressure on national services prices. But the Fed's models don't capture that regional channel well. Luna: So you're saying the Fed might be underestimating inflation persistence because it's not looking at the states where wages are really popping? Lucas: That's the concern. The 10-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, slipped to 2.25 percent on Thursday from 2.26. So markets are slightly less worried about long-term inflation. But if you zoom in on Nevada, you see a local economy that's adding jobs at a pace that could keep service-sector inflation elevated for longer. Luna: And the fed funds rate is at 3.63 percent, which is still restrictive. But the FOMC's next move depends on whether they think inflation is sustainably heading toward 2 percent. If regional pockets of strength are masking underlying stickiness, they might need to keep rates higher for longer. Lucas: Right. And there's a historical precedent for this. In the late 1990s, the Fed under Greenspan started paying attention to regional Fed surveys — the Beige Book — more systematically. But the Beige Book is anecdotal. What I'm talking about is quantitative: state-level wage data, state-level CPI proxies, the kind of thing the San Francisco Fed has been experimenting with. Luna: So the question is whether the FOMC should formally incorporate regional dispersion into its reaction function. Like, a rule that says if the standard deviation of state unemployment rates exceeds a certain threshold, they adjust the policy stance. Lucas: That would be a big shift. Currently, the Fed's mandate is national — maximum employment and stable prices for the country as a whole. They don't have a regional mandate. But if regional dispersion leads to national inflation persistence, then it's relevant. Nevada is the extreme example, but there are others: Texas, Florida, Arizona — all growing fast, all pushing up wages. Luna: And on the flip side, you have states like New York and California that are still below their pre-pandemic employment levels. So the national average is being pulled up by the fast growers and pulled down by the slow ones. The Fed sees a moderate picture, but the underlying reality is more polarized. Lucas: Exactly. And polarization matters for policy. Because if you raise rates to cool down Nevada, you risk hurting New York even more. If you hold steady, Nevada keeps overheating. The Fed's blunt instrument — the federal funds rate — can't target states. So they have to make a call about which risk they prioritize. Luna: And right now, with core CPI still above 3 percent, it seems like the overheating risk is winning. But the data from Nevada suggests it might be even worse than the national numbers imply. Lucas: Let me put a number on it. The Atlanta Fed's wage tracker shows that the lowest-quartile wages in the West region are growing at over 6 percent year-over-year. That's the leisure and hospitality sector, which is huge in Nevada. Meanwhile, the national average for all workers is around 4.5 percent. So the gap is real. Luna: And the Fed's preferred measure of labor market tightness — the ratio of job openings to unemployed workers — is still above 1.2 nationally. But in Nevada, that ratio is probably closer to 2. So the labor market there is extremely tight. Lucas: That's the kind of detail the FOMC should be discussing. And I know from the minutes that some regional Fed presidents have raised concerns about labor market tightness in their districts. But it's not yet a central part of the policy narrative. The new Fed chair, Kevin Warsh, came from a more hawkish background. He might be more attuned to these risks. Luna: So you think Warsh's first few meetings could see a shift toward incorporating regional data? Lucas: It's possible. In his first meeting, the big takeaway was that he's trying to modernize the Fed's communication. He mentioned using more granular data. Whether that translates into policy action remains to be seen. But if inflation stays stubborn, I expect the regional argument to get more airtime. Luna: So for listeners who are in Nevada or similar states, what does this mean practically? If the Fed stays tighter for longer, construction loans get more expensive, home prices might cool, but wages could keep rising as long as demand holds up. Lucas: Right. And for workers in slower states, the risk is that the Fed's caution prolongs a soft labor market. It's a trade-off. The Fed is trying to balance two mandates, but the geography of inflation complicates that calculus. Luna: You know, this kind of deep dive into the data is why I love doing this show. It reminds me that economic policy isn't just about abstract models — it affects real people in real places. Lucas: Absolutely. And if walking through the economy with us has made something click for you, we'd be grateful if you considered supporting the show. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Even just a few bucks helps us stay ad-free and focused on the stuff that matters. Lucas: So back to Nevada. One thing I want to watch is whether the state's wage growth starts to moderate as the construction boom matures. The data center build-out has a timeline, and once those are built, the labor demand could ease. But for now, it's a test case for how the Fed handles asymmetric labor markets. Luna: And the next FOMC meeting is in late July. We'll see if the minutes show any discussion of regional dispersion. I'll be looking for that. Lucas: Me too. I think it's one of the most underappreciated dynamics in the current cycle. Thanks for listening, and we'll catch you next time.