Underlying jobs market is still very weak despite strong report, says KPMG's Diane Swonk

Key Concepts

• Sticky Inflation: Inflation that is resistant to change and persists over a long period, often due to entrenched price-setting behaviors.
• Super Core Services: A measure of inflation that excludes food, energy, and shelter, often used to gauge underlying price pressures in the service sector.
• U6 Unemployment Rate: A broader measure of unemployment that includes the unemployed, discouraged workers, and those working part-time for economic reasons (underemployment).
• Monetary Policy: The actions taken by the Federal Reserve to manage the money supply and interest rates.
• Fiscal Stimulus: Government spending and tax policies designed to boost economic activity.
• Supply Chain Shock: Disruptions in the production and distribution of goods that lead to price increases.

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1. Main Topics and Key Points

The discussion centers on the divergence between market expectations—which anticipate the Federal Reserve holding interest rates steady—and the perspective of Diane Swonk (KPMG), who argues for two potential rate hikes due to persistent inflation.

• Labor Market Skepticism: Swonk argues that headline job reports are misleading. She points to the U6 underemployment rate rising to 8.2% (the highest since December) as evidence that the labor market is "weak under the hood."
• Inflation Persistence: Swonk highlights that inflation is no longer just an "oil shock" but a broader issue involving supply chain disruptions and "muscle memory" regarding price increases. She notes that the Fed has missed its inflation target for five years.
• Super Core Services: Steve Liesman (CNBC) presents data showing that PCE (Personal Consumption Expenditures) services, excluding food, energy, and shelter, are running at over 3%, significantly higher than the pre-pandemic norm of 2%.

2. Important Arguments and Perspectives

• The Case for Rate Hikes (Swonk): Swonk contends that the Fed has been "too dovish." She argues that multiple concurrent shocks (geopolitical tensions in Iran, supply chain issues, and fiscal stimulus via tax refunds) are creating a more persistent inflationary environment that requires a more aggressive policy response.
• The Case for Caution (Liesman/General Market): The counter-argument, supported by research (referenced as Bernanke’s work), suggests that if inflation is driven by supply shocks rather than monetary excess, raising rates could be overly contractionary and damaging to the labor market.
• The "Double-Edged Sword" of Fiscal Policy: Swonk notes that while tax cuts and refunds are currently supporting retail sales, they are simultaneously fueling sticky inflation by maintaining consumer demand.

3. Notable Quotes

• Diane Swonk: "We’ve really got a muscle memory out there of raising prices now that we haven’t had. And the Fed’s missed its target now for five years."
• Diane Swonk: "I really do think that the new Fed Chairman’s inflation-fighting resolve will be tested by financial markets."
• Steve Liesman: "It’s not that it’s 3% now, it’s that it normally was running at 2% before the pandemic. And now it’s three and change. And that’s the problem putting that upward pressure."

4. Data and Research Findings

• Inflation Expectations: Swonk notes that the New York Fed survey shows inflation expectations moving upward in both the near and long term.
• Wage Growth: Liesman mentions that wage growth is currently at 0.2%, suggesting that while there is an uptick in hours worked, the labor market is not yet creating the kind of wage-price spiral that would necessitate immediate, drastic rate hikes.
• Historical Context: The participants discuss the danger of repeating past mistakes, specifically the Federal Reserve’s historical tendency to be too contractionary in response to oil shocks, though Swonk argues the current situation is more complex than a simple oil shock.

5. Synthesis and Conclusion

The discussion highlights a critical tension in current economic policy: the Federal Reserve is caught between a labor market that shows signs of underlying weakness (high underemployment) and an inflation environment that is increasingly "sticky" and broad-based. While the market expects a pause in rate changes, experts like Swonk warn that the combination of supply chain shocks, geopolitical instability, and persistent fiscal stimulus may force the Fed to abandon its dovish stance. The consensus among the participants is that the "Super Core" services inflation is the primary metric to watch, as it indicates that price pressures have moved beyond volatile energy and food sectors into the broader economy.