Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Is Watching the Labor Market Tightness Number
Transcript
- Lucas: The Federal Reserve has a lot of data to digest right now. Core PCE came in at 3.3 percent for April, exactly as expected. Energy inflation is stickier than the Fed hoped, thanks to the Iran conflict. And yet, the number that seems to have Chair Powell's attention most is not inflation — it's the ratio of job openings to unemployed workers. Luna: That ratio is the tightness gauge, right? The one from JOLTS that used to be two-to-one at the peak. Lucas: Exactly. At the end of 2022, there were about two job openings for every unemployed person. That was a historically tight labor market. Today, that ratio has fallen to about 1.2-to-one. That's still a bit above the pre-pandemic level of 1.2, but it's close. The Fed's view is that when the ratio gets to that pre-pandemic level, wage pressures ease naturally, and they don't have to keep rates high to cool the economy. Luna: So the magic number is 1.2? Because that's roughly where we were in 2019, and the Fed thinks that's consistent with their two percent inflation target. Lucas: That's the framework. Minneapolis Fed President Neel Kashkari said on CNBC just last week that the inflation fight takes priority, but he also noted the labor market is in decent shape. He didn't sound alarmed about unemployment. And that's telling — because if job openings keep drifting lower, the ratio could dip below 1.2, and then the Fed starts worrying about the labor market weakening more than inflation. Luna: But let's be real — the Iran war is pushing energy costs up. CNBC reported the average household is paying an extra $450 on gas and energy. That filters into core inflation indirectly. How does the Fed square that? Lucas: That's the tension. The energy spike is a supply shock, which the Fed typically looks through. But if it persists, it feeds into expectations. And the Fed cannot afford an expectations spiral. So the labor market becomes the fulcrum. If the job openings ratio stays above 1.2, they can hold rates at 3.64 percent and let the energy shock fade. If it drops below 1.0, they'll have to cut, even if inflation is still above target. Luna: Interesting. So the JOLTS data, which comes out next week, is actually more important for the June FOMC meeting than the CPI print. Lucas: I think so. The ten-year yield is at 4.45 percent, down a bit this week. The bond market is pricing in a higher probability of a cut in the second half of 2026, precisely because the labor market is cooling. But the Fed has been very deliberate — they want to see that ratio settle consistently before they move. Kashkari's comments reinforce that. Luna: And the consumer sentiment numbers that hit a record low? The Fed seems to be ignoring those. Why? Lucas: Because consumer sentiment is distorted by partisan politics and by the shock of higher prices, not by actual labor market distress. People are grumpy, but they still have jobs. The unemployment rate is near historic lows. The quit rate is normalizing. The openings ratio is the concrete measure of slack. Sentiment is noise. Luna: You know, that's a really useful way to think about it. If today's conversation helped clarify why the Fed watches that one number, it's because we try to cut through the noise. If walking through the economy with us has made something click, the way these episodes stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Absolutely. It's a small way to keep this independent. And honestly, we appreciate the listeners who find this useful. Now back to that ratio — what's your take on whether we actually hit 1.2 in the next JOLTS report? Luna: I think we could. Job openings have been trending down steadily. The question is whether the energy shock causes companies to pause hiring more aggressively. If so, that ratio drops faster, and the Fed might have to cut sooner than they'd like. Lucas: Right. And that's the dilemma: if they cut too soon, and inflation reaccelerates, they lose credibility. If they wait too long, the labor market cracks. The ratio is their compass, but it's a lagging indicator. So they're walking a very narrow path. Luna: So what should listeners watch for next week when JOLTS comes out? Lucas: Two numbers: total job openings and the number of unemployed. The ratio is easy to calculate. If openings fall below 7 million, and the unemployed stay around 6 million, the ratio drops below 1.2. That would be a signal that the labor market is no longer tight. And that, more than CPI, might open the door for a rate cut in September. Luna: And if openings hold steady around 7.5 million? Lucas: Then the Fed stays on hold. They can afford to wait. The bond market will keep yields range-bound. And the energy spike will just be a headwind, not a game-changer. But the key is: the labor market is the variable that moves the Fed, not oil prices, not sentiment. Luna: So the takeaway for today is: ignore the headlines about consumer gloom, watch the JOLTS data, and calculate that ratio yourself. Lucas: Exactly. And if the ratio stays above 1.2, expect the Fed to hold firm. If it drops below, expect a pivot. It's that simple — at least for now. Luna: Great. We'll be back next week with the JOLTS reaction. Until then, keep an eye on those numbers. Lucas: Thanks for listening.