Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Surge in Job Openings That the Fed Cannot Ignore
Transcript
- Lucas: The April JOLTS report dropped this week, and it's a big one. Job openings surged to 7.62 million, up from 6.89 million in March. That's a jump of over 700,000 openings in a single month. Luna: Okay, that's a huge number. I remember March's figure felt like the labor market was finally cooling. This completely reverses that narrative. Lucas: It does, and it comes at a tricky moment. The Fed is already wrestling with CPI at 4.2 percent, the highest in three years. A tight labor market like this typically feeds into wage pressure, which then feeds into sticky inflation. Luna: If walking through the economy with us has made something click, the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep this going, and we appreciate it. So, back to the JOLTS number — the question is whether this is real strength or just noise. Luna: What do you mean by noise? The data looks pretty clear-cut. Lucas: Well, JOLTS is notoriously volatile. The month-over-month swing is within the margin of error for the survey. Plus, the response rate has been declining for years. So one data point doesn't make a trend. Luna: But the Fed has to react to the data they have, right? They can't just ignore a 12 percent jump in openings. Lucas: Exactly, and that's the tension. The Fed's dual mandate includes maximum employment, and this suggests the labor market is still red-hot. But they also have to contain inflation. With the fed funds rate at 3.63 percent and inflation at 4.2 percent, real rates are negative. That's accommodative. Luna: So you're saying the market is pricing in rate cuts later this year, but this JOLTS number might force the Fed to hold steady or even hike? Lucas: Right. The swaps market is still pricing in about two quarter-point cuts by year-end. But if openings stay elevated and CPI doesn't moderate, that narrative falls apart. The Fed's own dot plot from the last meeting showed most officials see one more hike this year. Luna: Let's tie this to the wage data. Average hourly earnings rose to $37.50 in May, up from $37.41. That's a 2.4 percent annualized increase — not alarming, but if labor demand stays high, wages could accelerate. Lucas: That's the transmission mechanism. Companies compete for workers, they raise wages, and then they pass those costs on to consumers. That's how a tight labor market keeps inflation sticky. Luna: But the CPI data also showed energy prices spiking, partly due to the Iran conflict. That's supply-driven, not demand-driven. The Fed can't fix supply chains with interest rates. Lucas: True, but the core CPI — excluding food and energy — still rose to 336.1 from 335.4. That's a 2.8 percent annualized increase, above the Fed's 2 percent target. So it's not just energy. Luna: What about the 10-year breakeven inflation rate? It's at 2.31 percent, up from 2.29 percent last week. That suggests the bond market expects inflation to stay above target for the next decade. Lucas: Exactly. That's the market's long-run expectation, and it's creeping higher. The Fed has to be concerned that if they cut rates now, they risk de-anchoring those expectations. Luna: So what does this mean for the June FOMC meeting next week? Any chance of a surprise? Lucas: I think they'll hold rates steady. The fed funds rate is at 3.62 percent daily, and the interest on reserve balances is at 3.65 percent. No urgent need to move. But the statement language will be key — they'll likely signal that they're watching labor market data closely. Luna: And if JOLTS stays at this level for another month or two? Lucas: Then the case for cutting rates evaporates. The market might start pricing in a hike. That would be a shocker, but it's possible. Luna: Let's look at the broader picture. The S&P is at 7,431, the Dow at 51,202. Small caps are outperforming with the Russell up 3.1 percent this week. That seems like a risk-on signal. Lucas: It does. The market is betting on a soft landing — inflation comes down without a recession. But if the labor market stays this tight, the landing might not be so soft. Luna: There's also the yield curve. The 10-year is at 4.49 percent, the 2-year at 4.21 percent. That's still inverted, but less so than earlier this year. Some see that as a positive sign. Lucas: The curve has been uninverting slowly, which historically happens before a recession. But this time, the economy is still growing — real GDP growth was 1.6 percent annualized in Q1, up from 0.5 percent. So maybe this time is different. Luna: Or maybe the recession is just delayed. The lag effects of rate hikes can take 18 to 24 months. We're only about 18 months from the first hike in this cycle. Lucas: That's a fair point. The unemployment rate is still at 4.3 percent, low by historical standards. But initial jobless claims ticked up to 229,000. It's not flashing red, but it's worth watching. Luna: So where does that leave us? The JOLTS number is a head-scratcher. It complicates the Fed's job, it complicates the market's soft-landing narrative, and it leaves everyone guessing. Lucas: I think the key takeaway is humility. One data point doesn't make a trend. But if the next JOLTS report shows another strong number, we'll have to rethink the whole outlook. Luna: And in the meantime, keep an eye on the Fed next Wednesday. The statement and the press conference will be must-watch. Lucas: Absolutely. Thanks for joining us on The Macro Memo. We'll be back tomorrow with more.