Fed fears ‘slamming the brakes on harder’ on rate hikes, professor says

University of Michigan's Ford School Professor of Public Policy and Economics Betsey Stevenson joins Yahoo Finance Live to discuss the November jobs report, wage growth, and future policy moves by the Fed.

Video transcript

DAVE BRIGGS: As Seana mentioned, a stronger than expected jobs report. Let's get you up to speed now on today's report. The economy adding 263,000 jobs, easily topping expectations.

The unemployment rate remains 3.7%. But arguably the most important number comes here-- average hourly earnings grew 5.1% from a year prior, well above the pre-pandemic pace of around 3%. One of the main contributors, of course, labor force participation, which remains below pre-pandemic levels.

Payrolls grew in leisure and hospitality, health care, and government. For more on the November jobs report, let's bring in Betsey Stevenson, Professor of Public Policy at the School at University of Michigan. Nice to see you, Betsy. But for a moment, I want you to be Jerome-- Jerome Powell. How do you feel he viewed this report, in particular wage growth?

BETSEY STEVENSON: Well, obviously, wage growth is worrisome here. And it's worrisome not because we don't want to see workers get raises. Of course we want to see workers get raises. But what we want is to see wages increasing at a rate that is consistent with 2% inflation.

And what's happening right now is they're increasing at a rate that's simply not consistent with that 2% inflation target. And so it does you no good if you get a raise if all the prices are going up as well.

And so what we want to do is see the wage growth slow so we can see price growth slow. So he's absolutely going to be worried when he sees that uptick in wage growth. But I think it's important to realize, that's not the only thing to look at in this report.

It's also not the only indicator of what's happening in the labor market. And so we want to take that broader look. I know that Chair Powell and his whole team, everybody on the FOMC and all the economists who work for them, are going to take a broader look at what's going on. Now, what we see is there are some signs of some sectors starting to slow down.

And I think we'll want to see, do we actually see evidence of that in our next jobs report? This one was stronger than we would expect. For example, the tech sector in this BLS report continued on its drunken hiring spree.

It's added a lot more jobs than not only where they were prior to the pandemic, but any sort of trend growth you would have expected prior to the pandemic. And yet, we saw another big uptick in job growth in November over October in these information jobs, despite those stories of layoffs.

It could be that the layoffs just hadn't hit the data by the time they were out there in the second week in November measuring it. It could be that layoffs are happening on the one hand and on the other hand, there are parts of the information sector that are continuing to expand. I'm definitely going to be taking-- spending some time looking at that data to see, do we see slowdowns there?

I think there are other sectors where-- ADP reported a slowdown and a loss of jobs in manufacturing, that wouldn't surprise me at all. It was sort of what I was expecting. And yet in this report, we saw growth in manufacturing. So I think the big question is, did we sort of just get lucky and everything sort of bounced in a positive job growth way, or is this a sign that the labor market really is hotter than some of those other indicators are suggesting?

SEANA SMITH: Well, Betsey, what do you think this all means then for the Fed and the implications just in terms of policy? Because the Fed clearly wants a larger slowdown when it comes to the jobs market. They're not going to be happy even if that number is $200,000-- what the estimate was for. So what do you think this means just in terms of how aggressive the Fed could potentially be because of this?

BETSEY STEVENSON: Well, first of all, I think that the Fed is not looking to see fewer people have jobs. What the Fed is looking for is to bring demand and supply into balance. And it's important to realize that labor demand is a derived demand.

The demand for workers comes from our demand for stuff, for goods and services. And what the Fed is trying to do is bring demand down so that demand and supply are in better alignment, and that will bring down inflation. That's going to have to bring down hiring in some sectors, because our demand is just sort of out of control relative to what could be supplied.

And then, of course, the other aspect of labor demand they worry about is we're all trying to hire more workers, but there aren't more workers out there, so we just keep bidding wages up and up and up and those get pushed through in inflation and that becomes a way-- what we call wage price spiral, where it's the increases in wages, the shortages of workers that drive inflation. I don't think we've seen that happen yet, but that's the thing that they're most worried about. So let's get at what should they do.

Powell is going to stick with what he said just earlier this week. They're going to raise rates 50 basis points in December. And the question for them going forward is, will they ultimately have to raise rates more than they anticipated? Or will they have to hold them for longer?

I think we're going to need more data coming in to be able to make that decision. The Fed is not overreacting to the great news that we got with PCE inflation slowing down, CPI inflation slowing down one month, and they're not going to overreact to an employment report one month showing hot wage growth.

DAVE BRIGGS: Always a disconnect between Main Street and Wall Street, but try explaining to Main Street that this makes it more likely that we go into a recession early next quarter, next year-- does it?

BETSEY STEVENSON: Well, the fear is that the Fed has to slam the brakes on harder-- meaning that what the Fed's trying to do is get us to stop consuming so much today, right? They want to raise the price of consuming today relative to tomorrow. That's what interest rates are all about. And if they have to raise interest rates further, if they have to hold them high for longer, that is going to try to keep down demand in a way that might ultimately lead the entire economy to contract.

You know, I still think it's more likely than not that we don't have a recession. And if we have a recession, it's more likely than not that it's a very mild and quick recession. But if the Fed is struggling to break the back of inflation, bringing it back towards its 2% target, it will have to go hard, deep, and long with high rates in order to get inflation down. And that increases the chance of a recession.

SEANA SMITH: Betsey, in terms of the layoffs that we have seen so far, much of them coming from some of those larger tech companies that we all are very familiar with, I'm curious just from what you've been noticing, the trends that you are studying. And I know you were saying you want to dig a little bit more into these numbers, but are you starting to see any signs of layoff or signals that's coming to you that we could potentially see that in other sectors?

BETSEY STEVENSON: So we're not seeing that in this monthly jobs report. I think that's where that sort of disconnect is that there's no tech sector workers getting laid off in this jobs report. The tech sector grew in this report and wages were on fire in the tech sector in this report, even more so than wages overall. So at the start of November, the tech sector was looking strong.

We all heard as we moved through November announcements of layoffs. I'll definitely be looking to see, do we see that show up in our December jobs report that we get in January? The only sign that layoffs are really maybe picking up a little bit in the data is if we look at all the people who tell us they're unemployed and we ask them, well, how did you end up unemployed? What we see is a larger share today are saying, I ended up unemployed because I was laid off.

And what's the alternative-- they could have quit or they could be a new entrant to the labor market. So we are seeing a tick up in the number-- in the share of the unemployed-- the number of unemployed people that are saying they're unemployed because they were laid off. And we're also seeing a rise in the number of people who are continuing to receive unemployment insurance payments, which really is about a decrease in the rate at which people are finding jobs and exiting unemployment insurance.

So both of those things, to me, point to the fact that there is a little bit of a slowdown underway. But you have to look hard at this report this month to see signs of it.

SEANA SMITH: It's hard to make sense of some of the numbers that are coming out. Betsey Stevenson, always great to have you. Thanks so much for joining us this afternoon.