A jobs data rumble | Financial Times

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Good Morning. Ethan is here; Most on Saturday. Federal Reserve officials spent yesterday insisting, “Guys, we’re really going to raise interest rates until inflation comes down.” Treasures were sold, a lot. The 10-year was up 14 basis points and the five-year nearly 20 basis points.

In other news, after her inaugural newsletter yesterday, readers proposed Katie has to write happy things about ESG just to annoy Rob while he’s gone. Rob hired me, so my official position is that I condemn Katie and her antics. If you feel otherwise, email us: and

Still debating a soft landing

back in June, we wrote about Fed Governor Christopher Waller’s theory of a soft landing. The gist of his argument: the labor market is so tight that restrictive monetary policy can knock down historically high vacancies while raising unemployment only slightly. That’s the rough story, anyway. We were skeptical but, then again, the only PhD that Unhedged employs is in philosophy.

It took another month for some heavyweight economists to have their say. In July, Larry Summers, Olivier Blanchard and Alex Dumas hit Waller and Fed with Kamala. Newspaper. It brought a Answer from Waller on Friday and Answer-to answer From Summers and others this week headlined, “The Fed is wrong: Lower inflation unlikely without raising unemployment.”

The gist of the Blanchard-Domache-Summers argument is that vacancy rates—vacancies divided by the labor force—have never fallen from a peak without a significant increase in unemployment. The orange lines below show each two-year period after a peak in vacancy rates since 1953. The pattern looks uniform. Vacancies are down, unemployment is up, often by a lot:

A simplified version of the diagram shows the decline more clearly:

Moreover, the vacancy rate appears to have peaked in March:

So if history is any guide, Summers and others argue, the next few years should come with a vicious jump in unemployment.

Waller’s counter is that history may not be a good guide this time. The job market has perhaps never been tighter, workers have never been more in demand. So you have to rely on theory instead. Waller and co-author Andrew Figura envision a world where a normalization of the vacancy rate, down from today’s 7 percent to 4.6 percent pre-Covid, coincides with only a 1 percent increase in unemployment. They write:

We recognize that it would be unprecedented for job vacancies to fall by a large amount without the economy falling into recession. As a result, we are actually saying that something unprecedented can happen because the labor market is in an unprecedented state.

This chart from Waller’s speech in June helps illustrate his thinking. It shows the vacancy rate on the vertical axis and unemployment on the horizontal. The points clustered near January 2019 are pre-pandemic observations, while the path extending after March 2022 are all post-pandemic data. After a pandemic, vacancies are higher at every unemployment level, compared to before the pandemic began. Waller claims that the vacancy rate can return to the old reality without unemployment rising much (green arrow):

Why might it work? Back to Waller and backlog:

because of the [ratio of vacancies to unemployment] It is so high right now that vacancies can be reduced with much less impact on character hiring. Additionally, since such a drop in vacancies would still leave labor demand strong (a 4.6 percent vacancy rate is historically still quite high), it seems likely that layoffs, which historically are only high (above their longer-term trend) when labor demand is weak, will not rise significantly .

There are those who find this argument reasonable. In the interview, we are different Yesterday, San Francisco Fed President Mary Daly pointed to a tech hiring freeze as an example of job vacancies falling without unemployment rising. Even critics find it hard to deny outright, as Summers, Dumas and Blanchard write: “Given that the current vacancy rate is outside of historical experience, anything is clearly possible.”

But the biggest reason to doubt Waller is that monetary policy works like A hammer, not a chisel. It stifles demand indiscriminately, between industries that are hiring like crazy and industries that already employ them Cutting the number of employees. As the FT’s chief economics commentator, Martin Wolf, put it:

What are the chances of that? [tighter monetary policy] Will it only reduce demand in offices where there are significant vacancies, without also reducing demand in struggling companies that are considering laying off people? zero.

There is also no chance that just by reducing the demand, the matching of job seekers to vacancies will become immediately immediate. Those who lose their jobs will need time to find new workers in this weak economy.

I don’t see any reason why a decrease in aggregate demand would only affect vacancies and not employment. It would be nothing short of a miracle.

The soft landing story that Waller tells, in other words, never happened and seems unlikely at best.

One good read

This Taipei Times editorial About Nancy Pelosi.

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