Transcript:
Easan Arulanantham:
How does the Fed control the job market? Since like the fed only has a limited amount of tools? So how do they specifically, like slow demand for jobs?
Tom Vaughan:
Yeah, I mean, let’s review what those tools are, first of all, and there’s lots of little ones. But the three biggies that come to mind that I think are important. Number one, the Fed talks about raising interest rates, which is what they’ve done first, that was the first thing they did, they started that in November. And they really aggressively talk as they got more aggressive from November through, you know, really now about raising interest rates, fighting inflation, slowing down the economy, you know, they say the words that scared of the stock market, or certainly, but they also say the words that make the bond market react. And so now all of a sudden mortgage rates went from below 3%, to above 5%. Now, housing is a huge component of the economy. So, you know, if you slow down housing, right, there’s a bunch of jobs that might not be open anymore, because new people, you know, in construction aren’t adding, you know, new people. So that talk is first. The second, you know, thing that they really have done here is to raise rates. And, you know, this is their standards scenario, rates were basically at 0%. And now they’ve raised them up, you know, twice a quarter percent. And now, you know, half a percent in this last meeting. And obviously, when you raise rates, it makes borrowing costs higher. And, interestingly enough, there’s probably a psychological component of that also, just because businesses look at that and say, Wow, here’s the trend, you know, things are going to be going up here in terms of rates.
When they’ve done that in the past, the economy does slow down. So if I’m a business person thinking about in future investment, I might buy this big machine, maybe I won’t, until I see how things play out here. Because if the economy cuts down, I’m gonna end up with this big machine, or whatever it is, or these people that I’m hiring, right. And so maybe I won’t hire as many people right now, because I’m not sure about the future. Yeah. And then the other thing that they’re doing, and this one’s actually kind of interesting. And that’s, of course, letting bonds fall off of their balance sheet or actually selling some of those bonds. And it’s, it’s what called quantitative tightening. So quantitative easing is when they were buying those bonds. And now quantitative tightening, they’re letting them go. And it’s a little bit controversial as to what that really means. And how much impact does that have, we have great data on raising interest rates, definitely going back forever. Quantitative Easing, really, and tightening has really started with the 2008 downturn. So we’ve only had a little while to really see how that plays out. But that would be another thing that they’re using. All of these, in essence, are trying to slow down the economy, and make businesses think about not putting up new jobs, in essence, because they’re just nervous about what the what the demand will be for their products, you know, going forward.
Easan Arulanantham:
So yeah, but those still seem quite blunt, and it’s not very targeted, it seems like kind of hits everything, but not really specifies.
Tom Vaughan:
Yeah, exactly. So if you’re in a business, that isn’t really hiring, you know, and you’re still gonna get whacked on the head, and slowed down, you know, because maybe you’re already kind of slow. And you’re going to be even slower, theoretically, as they go through this process. Yeah, they don’t have kind of surgical techniques to come into certain industries and deal with it. And some job openings are open, because there’s no, there’s nobody to take those jobs, we don’t have enough Americans that are trained in that particular area. And even if you try to slow down the economy, there’s still so much demand for those people, because there’s nobody here to do it. I know that used to be true with software engineering for a long time. I don’t know if that’s true now or not. But nonetheless, so that’s why you’re exactly right. It’s sort of as blunt thing, it’s a big sledgehammer, it hits all businesses, whether they’re going fast or going slow. And so it can be you know, it’s something to pay attention to when they start to raise rates. We are in the infancy though, we’re just beginning. So you got to be careful with being too you know, too forward thinking as to what might happen but, but that’s, that’s the Feds methodology. And they did speak about that a lot. They, they talked about getting job listings down as as a good thing. Obviously, usually you want those job listings, that’s what your your session, you want more job listings, but then you know, everything has a too good and too bad scenario. You want this kind of middle ground. And so right now, there’s too many job listings, and that’s going to create this wage inflation spiral that they’re worried about. So yeah, it’s good. It’s a good question.